The use of credit default swaps in muniland is poised to take off, a project that’s being called the “U.S. Municipal CDS Bang.” Starting Apr. 3, the terms and conditions of new muni CDS have been standardized with the stated intent of creating a useful risk-hedging product. This project is being driven not by regulators but by Markit, a private market-data vendor, and the International Swaps and Derivatives Association, a global consortium of Wall Street banks. But it’s not so clear that this is what the market needs at this time…
Municipal CDS do not trade publicly, nor do they have publicly available pre-trade or post-trade information. All available pricing information for muni CDS comes from Markit, the privately held market-data firm in London… I discovered that the banks that provide the pricing information for muni CDS are mostly the same banks that sit on the Markit Board of Directors and the Determinations Committee of ISDA, the organization that decides if an event that occurs in the underlying reference bond should trigger a payout of the CDS.
In other words, the handful of banks that control the pricing of muni CDS are the same banks that seem to control the firm that collects these quotes (see table below for listing of banks). Moreover, these same banks seem to decide whether these products pay out in a credit event. Coincidentally, the banks – Bank of America-Merrill Lynch, Citibank, Goldman Sachs, JPMorgan and Morgan Stanley – are the same ones that dominate the cash market in municipal bonds.
via Muni CDS goes ‘bang’ | MuniLand.
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