Tracking big increases in counterparty credit risk
Previous peak came after September collapse of Lehman and AIG, CDR says
By Alistair Barr, MarketWatch
Last update: 2:00 p.m. EDT March 9, 2009
SAN FRANCISCO (MarketWatch) -- Counterparty credit risk in the derivatives market surged to a new record Monday, reflecting concern that the U.S. financial system remains fragile in the midst of a long recession.
The CDR Counterparty Risk Index, which tracks credit default swaps on leading banks and brokerage firms, jumped more than 13 basis points to a record 300.9 during midday action.
The index, compiled by New York-based Credit Derivatives Research, has risen more than 53 basis points since last week. A basis point is one-hundredth of a percentage point.
Credit default swaps are a common type of derivative contract that, as the name implies, pay out in the event of default. When prices for credit default swaps rise, that suggests investors are willing to pay more to protect against defaults.
The CDR index focuses on the banks and brokerage firms that control most of the trading in the market for credit default swaps. The index hit a record 430.8 on Sept. 17, after the Lehman Brothers bankruptcy and the collapse of American International Group AIG CDR introduced a second series of the index after Lehman dropped out. This new version sett a record at 300.9 on Monday.
Credit default swaps on Citigroup Inc. and Barclays PLC rose more than 30 basis points during midday action Monday.
Meanwhile, the swaps on Merrill Lynch, now part of Bank of America Corp. climbed more than 25 basis points, while swaps on Goldman Sachs rose 22.5 basis points, according to CDR.
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Alistair Barr is a reporter for MarketWatch in San Francisco.
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