Cutting Edge introduction: clarity needed on credit adjustments

A debate over whether to include counterparty risk adjustments at the point of default is animating quants, but either of the obvious answers could exacerbate systemic risk. Laurie Carver introduces this month’s technical papers

The International Swaps and Derivatives Association has been getting some bad press recently, after its decision to take the proposed Greek debt restructuring – under which bondholders would be invited to take a 50% haircut – at face value. If the deal did not bind all bondholders, it would not be likely to trigger credit default swaps (CDSs) on Greece, Isda said. Some market participants worry that could destroy the credibility of sovereign CDSs as a product.

Strangely, even if the contracts