CVA desks to keep buying sovereign CDSs – even if they never pay out
Even if CDS contracts are not triggered in Greek restructuring, Basel III's CVA charge ensures the market will live on - but episode raises fresh questions about design of capital framework, dealers say
The Basel III credit value adjustment (CVA) capital charge means demand for sovereign credit default swaps (CDS) will continue – and possibly grow – even if attempts to avoid triggering contracts on Greece undermine the market's value as a hedge of default risk, dealers say.
A voluntary 50% haircut of Greek bonds outlined as part of the latest eurozone deal is unlikely to trigger payments on existing CDS contracts referencing Greece, according to the International Swaps and Derivatives
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