LOS ANGELES - As industry representatives work to form a standardized framework for trading credit default swaps that reference CDOs, perhaps the biggest roadblock to completion is how to handle the write-down provision of the swaps. A CDO is not immediately written down following a credit event, making it difficult for parties betting on the deal's performance to either collect or make payments in a timely matter, said speakers at the Asset Securitization Forum's Sunset Seminar held here last week.
Much anticipation surrounds the release of standardized documentation for CDO CDS trades, yet the push and pull between various sides of the CDO sector has left the documentation unfinished thus far. In large part, market participants are looking forward to the opportunity to short the CDO sector. According to JPMorgan Securities, increased CDO CDS liquidity could result in increased CDO spread volatility. Groups that were coordinated by International Swaps and Derivitives Association have been meeting for months in order to develop a set of rules for the trades.