CIT default swaps will be settled by auction-ISDA
Tue Nov 3, 2009 1:47pm EST
NEW YORK, Nov 3 (Reuters) - Credit derivative dealers will settle credit default swaps insuring the debt of CIT Group (CITGQ.PK) in an auction after the commercial lender filed for bankruptcy, the International Swaps and Derivatives Association said on Tuesday.
The auction is expected to be one of the largest since the failure of Lehman Brothers (LEHMQ.PK) due to the large amounts of protection written on CIT's debt, though market participants said the process has been well tested and is unlikely to create market disturbances.
Around $3.1 billion in net volumes is outstanding in single name protection on CIT's debt, according to data by the Depository Trust & Clearing Corp. In addition, CIT was included in a number of tranche trades based on CDS indexes and was a common credit in Collateralized Debt Obligations.
The auction will set a value for the CDSs, which will be used to close out positions.
CIT, a lender to hundreds of thousands of small and medium-sized businesses, filed for bankruptcy on Sunday, as the global financial crisis left it unable to fund itself and the recession clobbered its loans.
A date for the auction has not been set. CDSs are used to protect against a borrower defaulting on their debt or to speculate on their credit quality.
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