CDS redesign to save sovereign bondholders from heavy losses

Author: Gemma Varriale | Published: 11 May 2012

CDS redesign that could save bondholders from another Greece

A radical redesign of credit default swaps (CDS) looks set to save sovereign bondholders from the heavy losses imposed during the recent Greek restructuring.

The draft report, published on May 6, outlines a system designed to ensure that CDS protection payouts reflect actual losses to bondholders.

“The redesigned CDS contract would allow settlement based on the market value of whatever the sovereign gives a bondholder in exchange for each old bond,” said Stanford professor Darrell Duffie and student Mohit Thukral in the report.

This market value would be determined in a settlement auction.

Duffie and Thukral devised the innovative concept following Greece’s landmark debt restructuring in March. The resultant exchange reduced the outstanding sovereign debt by around €100 billion....