CDR reports on high counterparty risk and implications

Credit Derivatives Research reported today on the high levels of counterparty risk following Lehman Brothers’ bankruptcy. With massive unwinds of open CDS positions and continued market turmoil, the broker-dealer business model is increasingly under both strain and question, it says. Accordingly, the CDR counterparty risk index largely bypassed its widest level by over 100 basis points, to 389.33 bp this morning.

CDR notes that European financials are outperforming those of the US in both CDS and credit markets. This general trend augments other developments, such as Morgan Stanley CDS surpassing 800bp, and rumours of considerable write-downs for Merrill Lynch are emerging. Wachovia and Citi’s risks currently retain the highest spreads, and Washington Mutual is on the brink of default. CDR points to the importance of stringent regulation, increased transparency, and a central exchange-based clearning in such times of high counterparty risk.