Gaining Perspective On CDS Liquidity

On the day when KfW wired EUR300 million to the defaulted Lehman Brothers, it became clear that a new regime for risk control and counterparty risk assessment was imminent. No longer could the middle office operate in an end-of-day or end-of-week environment while the front office operated in real-time. This article illustrates how an institution can significantly enhance its ability to actively manage counterparty credit exposure by using credit default swap information provided by the Credit Market Analysis (CMA) independent CDS data service. It will also introduce CMAs market activity indicators, which provide information that is not contained in CDS pricing, but which can have a significant and valuable impact on counterparty credit assessment.