QCDS is Back
Since the bangs (small and big) in 2009, CDS (indices and single names) are trading with a standard full coupon - 1% and 5% are the most common coupons -. The market price adjustment is settled upfront, via a T+3 fee payment including the accrued coupon. For instance, a CDS on Italy will trade at 100 basis points (1%) plus a 5% upfront fee (clean fee). To convert the fee into a yearly cost, the fee must be accrued over the life of the CDS conditional to the survival of the CDS. Based on a simple default model, ISDA and market participants have agreed on a standard transformation of the fee into a coupon adjustment - the ISDA CDS Standard Model (the “ICSM”) -. The community has agreed as well to use standard recovery rates for the conversion, depending on the CDS transaction type and the CDS seniority. This ICSM implementation coded in C is open source while the interest rates must be downloaded daily on a dedicated website. Bloomberg had made a function available, QCDS, which was a simple implementation of the ICSM. The function is no longer available: users must go through the CDSW function, which is more complex to use. OTCStreaming is reviving the simple QCDS function introducing its Calculator. You can either enter a CDS ticker (using OTCStreaming ticker convention) or provide the transaction terms (coupon, currency, maturity and standard recovery); OTCStreaming will compute the Cash Amount and the various associated prices. For a 10M CDS, Italy 5% upfront fee will settle for USD 474,722.22 to be paid by the protection buyer, an ICSM Spread of 212.73bps. Either quoting a CDS Upfront, or an ICSM Spread or eventually a cash Price, OTCStreaming will display the right Cash Amount to be settled using the market place tool, based on the market place standard conventions and tools.
In addition to the conversion, OTCStreaming provides 2 useful numbers: The Risky BP and The Full Upfront. The Risky BP is the net present value of a 100% coupon within ICSM’s framework. Adding the standard coupon times this Risky BP to the fee provides a Full Upfront cost estimate. For Italy, the expected total cost of the protection is 9.5%, a 16% probability to default on its debt within the next five years.
The ISDA Calculator is used every day by market participants. CDS are either quoted using ICSM spreads for investment grade CDS, or Upfront for high yield CDS. A few indices are quoted as a Cash Price but most of them are quoted as ICSM spreads. OTCStreaming provides a new and easy access on its website and as well using a REST API.
The factor is a rebate on the notional for indices with defaulted entities. For one auctioned default within an index having 100 members, the factor is just 99.
A few tricks to know: by default, the price is supposed to be an ICSM spread. When adding a % to the input, the price is considered as an upfront if the price is lower than 80% and as a cash price if it is higher. The web page has been designed for a PC. A mobile version could be designed upon users’ request.
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