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Equity v credit derivatives showdown: Difference between revisions
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The {{eqdefs}} were published in 2002 and, while not perfect, do a serviceable enough job at describing what is essentially, and usually, a fairly straightforward product, though they get a bit gummed up about dividends. The product traded is for the most part a [[delta-one]] exposure to shares, share baskets and indices and, while hedging can be fraught in times of dislocation, and hedging costs get passed through to end users, the basic notional value of an equity derivative is not: the market price if a listed share: you can see it printed in 6 point font in the Financial Times every day. | The {{eqdefs}} were published in 2002 and, while not perfect, do a serviceable enough job at describing what is essentially, and usually, a fairly straightforward product, though they get a bit gummed up about dividends. The product traded is for the most part a [[delta-one]] exposure to shares, share baskets and indices and, while hedging can be fraught in times of dislocation, and hedging costs get passed through to end users, the basic notional value of an equity derivative is not: the market price if a listed share: you can see it printed in 6 point font in the Financial Times every day. | ||
The {{cddefs}} are for the connoisseur ISDA ninja. They have an abstract intellectual purity fairy brutally dislocated from the messy business of real world of market trading. They are the stuff of JP Morgan brainboxes, QC opinions, and -threatening financial disasters. The product emerged in the 1990s, became highly fashionable, by 2003 had earned its own definitions booklet, and as the CDO mania of the noughties reached fever pitch, began to become standardised. Each credit default represented a lesson learned about the multifarious ways in which the product | The {{cddefs}} are for the connoisseur ISDA ninja. They have an abstract intellectual purity fairy brutally dislocated from the messy business of real world of market trading. They are the stuff of JP Morgan brainboxes, [[Potts Opinion|QC opinions]], and civilisation-threatening financial disasters. The product emerged in the 1990s, became highly fashionable, by 2003 had earned its own definitions booklet, and as the [[CDO]] mania of the noughties reached fever pitch, began to become standardised. Each actual credit default represented a lesson learned about the multifarious ways in which the product didn’t work very well, but its real “come-to-Jesus” moment was the [[credit crunch]] of 2007 and then 2008’s full blown [[global financial crisis]], both of which revealed the degree to which a nice idea in theory doesn’t hold up so well in the white heat of conflict. There was a ''lot'' of litigation about misfiring — or allegedly misfiring — credit derivatives. | ||
The {{cddefs}} were monstrously overhauled in 2014, and at the same time the product standardised yet further, moving away from single name, bilateral, privately negotiated deals and towards cleared, standardised, broad-based index products. There are still some privately negotiated deals but, compared with equity swaps, which are the bedrock of hedge fund equity long/short strategies, not many. More that ten trades a week on a given Reference Entity rates special mention in ISDA’s credit market summary. | The {{cddefs}} were, consequently, monstrously overhauled in 2014, and at the same time the product standardised yet further, moving away from single name, bilateral, privately negotiated deals and towards cleared, standardised, broad-based index products. There are still some privately negotiated deals but, compared with equity swaps, which are the bedrock of hedge fund equity long/short strategies, not many. More that ten trades a week on a given Reference Entity rates special mention in ISDA’s credit market summary. | ||
Part of the lack of popularity is the sheer complication of the {{cddefs}}. Unlike the {{eqdefs}}, the 2003 Credit Derivatives Definitions really didn’t work, the move away was propelled by regulator angst and infrastructural imperative, so there was not the option of flat-out ignoring them, as the market did to the ill-fated [[2011 Equity Derivatives Definitions]]. | Part of the lack of popularity is the sheer complication of the {{cddefs}}. Unlike the {{eqdefs}}, the 2003 Credit Derivatives Definitions really didn’t work, the move away was propelled by regulator angst and infrastructural imperative, so there was not the option of flat-out ignoring them, as the market did to the ill-fated [[2011 Equity Derivatives Definitions]]. | ||