Standard confirmation for preferred CDS hammered out

Eight dealers have agreed upon standard documentation for preferred credit default swap (CDS) transactions. The new standards will likely enhance liquidity of the nascent market.

While similar to senior unsecured credit default swaps, these products include a fourth credit event – the deferral of a preferred or hybrid security coupon or a preferred stock dividend.

Defining the deliverable security had been an area of contention, but under the new standards, preferred-level securities will be the only additional deliverable obligation. Previously, the deliverable was a preferred security or anything higher in the capital structure.

The eight dealers are Bear Stearns, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan, Lehman Brothers and Merrill Lynch.