CDS Auctions and Recovery Rates: An Appraisal

Abstract

In 2005, the International Swaps and Derivatives Association (ISDA) introduced an auction mechanism to facilitate settlement following a credit event in the multi-trillion-dollar credit-default swap (CDS) market. The auction identifies a price for the defaulted instrument and this price is then used to cash-settle CDS contracts with protection sellers paying protection buyers the instrument's par valueminus the auction-identified price. Today, almost 8 years and a hundred auctions since its introduction, an appraisal of the auction mechanism and its functioning appears in order.