Nominal or Net Credit Default Swaps

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ewilkerson's picture
ewilkerson
Status: Gold Member (Offline)
Joined: Jul 18 2010
Posts: 390
Nominal or Net Credit Default Swaps

I keep getting different answers on this question. as to whether it is the nominal or net amount of CDS that counts.  Greece has around $70 B nominal Credit Default Swaps (CDS) and $3B net CDS.  In all likelihood if Greece passes the law requirinng 100% participation if they only get 50% this should trigger a credit event.

Here's what it boils down to to me if I understand correctly.  The $70B nominal is spread around to many different parties.  The net of those betting for and against Greece is $3B.  Most people say it is the net that counts.  I completely disagree.  That $70B is not all lined up with the same parties to net out to $3B.  There are multiple parties holding differing amounts I assume.

What happens if someone has bet $10B against a default and there is one or someone for a default and there isn't one?  I could go on, but you get my point.  It appears to me that the risk to the financial system is far greater than $3B or around half the $70B.  You could under unlikely circumstances have much higher losses. 

I know many people place bets both ways to hedge, but it still seems the risk could be far greater than the net amount.

I may be  completely misunderstanding the system, so I would love some help.

Here is a Greek article: http://dealbook.nytimes.com/2012/02/21/greek-crisis-raises-new-fears-ove...

Thanks in advance,

Ernest

Travlin's picture
Travlin
Status: Diamond Member (Offline)
Joined: Apr 15 2010
Posts: 1322
Try this

Ewilkerson

The lie of bilateral netting depends on all counterparties paying off.  AIG proved that is a frail reed to depend on.

Try this.  You may find it helpful.

http://www.zerohedge.com/news/how-us-banks-are-lying-about-their-europea...

Travlin 

ewilkerson's picture
ewilkerson
Status: Gold Member (Offline)
Joined: Jul 18 2010
Posts: 390
Nominal or Net Credit Default Swaps

Travlin,

Thanks so much for the article.  I could not have found a better explanation.  You know derivatives are paid before customer accounts in bankruptcy.  B of A  just transferred $50 Trillion into the bank, but you probably saw that headline.  But if B of A fails, the assets are pooled, so the brokerage accounts would be wiped out from what I understand.  Too bad the public can't depend on talking heads to educate them on the important things.  Thanks again.

Cheers,

Ernest

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