Credit Event Fixing For Defaulted Bonds
London/New York, November 4, 2005 - Creditex, Inc. ("Creditex") and Markit Group Limited ("Markit"), in partnership with 15 major credit derivative dealers, have successfully conducted a Credit Event Fixing today to generate a cash settlement price for contracts referencing the defaulted bonds of Delphi Corporation ("Delphi") as agreed under the Delphi CDS Index Protocol. Delphi filed for bankruptcy on October 8, 2005, and is included in various credit derivative indices published by CDS IndexCo and Dow Jones. At 10:55 am EST, the final price for certain Delphi bonds was fixed at 63.375%.
The Credit Event Fixings are being used as part of a Protocol developed by the International Swaps and Derivatives Association (ISDA) in consultation with dealers and the broader market. The Protocol enables the 574 adhering institutions to amend their credit derivative index contracts referencing Delphi from physical to cash settlement. The Credit Event Auction was administered by Creditex and Markit to determine the final cash settlement price.
The fixing methodology has been enhanced from previous fixings to significantly reduce the basis risk between cash and physically settled contracts. The new methodology builds on that previously employed by Creditex and Markit in relation to the defaults of Collins & Aikman, Delta Air Lines and Northwest Airlines.
In addition to entering a tradeable bid and offer price as in previous fixings, auction participants were required to represent the bond position they would have held if the contracts had been physically settled. The new methodology reduces the overall basis risk between cash and physically settled contracts by making the participants indifferent between the two settlement methods for contracts covered by the Protocol.
Commented Mazy Dar, Head of Electronic Platforms at Creditex, "The enhanced methodology is a significant step forward in the ongoing development of the Credit Event Fixings and is laying the groundwork for a market-wide solution for a more efficient way to settle large numbers of contracts under a credit event."
"The Delphi Credit Event Fixing was very important because it not only created a cash settlement price, but also enabled participants to transact bonds in the underlying auction, reducing basis risk and at the same time easing settlement issues. It was the largest and most significant auction to date, and marks another milestone in the development of the credit derivative market", said Kevin Gould, Executive Vice President and Head of Data Products and Analytics at Markit.
The Credit Event Fixings are designed to ensure a transparent and fair process which is representative of the trading market level. Creditex provides the electronic platform for the operation of the fixings.