Skewed views: banks, auditors split on CDS index trades

Views on risks and accounting treatment of arbitrage repack differ across the Street

Skew notes are popular with yield-hungry investors, but Street is split on how to structure them

An old-school money making strategy has found its way to a new roster of investors. The credit default swap (CDS) index arbitrage trade, which exploits mispricings between the CDS indexes and their single-name constituents, was a highly lucrative hedge fund play in years gone by.

This year, some banks have been packaging up this intricate basis trade into so-called skew notes, leveraging up the exposure, and selling millions of dollars worth to European insurers and private banks desperate for