Credit default swaps. International Association of Swaps and Derivatives

Credit default swaps do not have a very good reputation among financial officials. Repeatedly heard opinions that CDS distort the economic picture in a negative direction. What is this and why is the increase in their cost so much worrisome for market participants?

History of appearance

The very first credit default swap in history appeared in 1990 thanks to the joint actions of specialists from Bankers Trust and JP Morgan. The need for its appearance was due to the protection against risks for large corporate loans that were provided to the company's customers. Initially, the tool had a relatively small amount, then by the end of the 1990s it was already equal to several hundred billion dollars, and now it has grown rapidly to 28 trillion dollars.

What role do they play?

If you explain the credit default swap on your fingers, then it is a special form of bond insurance, through which the buyer can transfer to the investor the risk of default of the borrower on interest payments. The prices for such insurance are measured in hundredths of percent or in basis points.

For example, if a credit default swap is traded at a cost of one hundred basis points, it means that the protection of 10 million dollars of bonds will cost 10 thousand. Such a transaction (swap) provides a certain guarantee at a reasonable cost.

How it works?

Each of the credit default swaps of European origin is created by a "master agreement", which was issued by the International Swapsand Derivatives Association (ISDA). It unites all the largest investment banks, as well as other investors in over-the-counter derivatives. Such conditions are very important, since credit default swaps are not available on organized exchanges. In essence, they act as the result of an agreement between sellers and buyers, in whose role investors and investment banks act.

How does CDS work?

The International Association of Swaps and Derivatives has five committees of regional significance, consisting of large investors and banks. This is due to the fact that the concept of a credit event and default is difficult to determine. The above-mentioned committees are the final arbiters in this matter.

This works as follows. Any investor has the opportunity to send a request to the committee, which will be passed without fail. Next, we will consider whether there is an occurrence of a credit event and whether a deal can be made.

Swap in the modern economy - what can go wrong?

Since this financial instrument is of a contractual nature, there are too many factors that need to be taken into account, and a lot of instructions. The most important component is that credit default swaps are conditionally based on the borrower or assets. If the underlying asset has changed its name, the consequence may be a refusal to pay out the CDS. A large number of investors were faced with this circumstance in the onset of the financial crisis, when some large banks went bankrupt.

Today, most investors are interested in finding new generation financial instruments for the purpose of investing their resources. This is the reason for the growing popularity of credit default swaps. As experts note, the default swap on loans is of great importance in modern conditions.

CDS in the USA

Over the past few years credit default swaps have become the most in demand in the US, which is explained by the sharp increase in credit risks. Since this tool is not under the control of stock exchanges or government agencies, it is impossible to obtain reliable information on the volume of their turnover. How ISDA assesses this situation, hedge funds most actively traded default swaps after the 2008 crisis, and now the situation is undulating.

Earlier, financiers from different countries of the world practiced numerous speculations regarding default swaps. The result of these actions was the collapse of some significant financial institutions. Many large banks and insurance companies were actually ruined because of operations with CDS.

Credit default swap in Russia

Let's consider what is happening today. Note that in Russia credit default swaps did not win the same popularity as abroad. This is explained by some problems that need to be solved with the help of the experience of other countries. As the trade in default swaps had a gradual formation, their distribution in the market in Russia is somewhat difficult.

The main obstacle to the spread of CDS in Russia is the peculiarities of the structure of the borrowing market. In fact, it turns out that the demand for loan resources significantly outstrips supply, and this gives banks the opportunity to set their own conditions regarding rates and terms. The Russian borrowing market has a certain tendency associated with the development of short-term loans offering a fixed rate. In turn, a floating rate is present only in long-term loans (from one year or more), and such loans can be provided only to borrowers with a good credit history. In addition, only large banks are involved in this. All this indicates that there are problems with hedging the risks of change. In addition, the qualitative formation of the CDS market in Russia may have obstacles in the form of speculations with derivatives, which has already been observed in other countries and has had negative consequences.

Despite the fact that the assessment of credit default swaps, like their reputation, is very ambiguous, the participants of the financial Russian market are optimistic about their distribution. This is understandable, since holders of debt securities will be able to minimize credit risks, as well as to release the funds reserved for loans. This will be possible due to the fact that after buying a swap, the risk of non-return of funds will be borne by a third party. All this in the future can improve the liquidity of the debt market as a whole. Vendors, in turn, will have the opportunity to earn extra money by issuing derivatives.

The conclusion from all this can be done the following: credit default swaps can be successfully introduced into the Russian market, but for this it will be necessary to carefully settle and systematize their trade. In addition, it is necessary to create conditions for the emergence of mass interests in the CDS as a qualitative instrument of hedging against default, and not as an object of speculative resale.