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Counterparty Risk In Cds Auctions

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by Felix Salmon
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Feb 22 2008 12:00am EDT

Counterparty Risk in CDS Auctions

Diana Henriques has a piece in today's NYT about CDS auctions. There are opaque auctions, like one recently held for something known as "pay as you go" credit default swaps; there are also transparent aucions, held by Creditex and Markit. But in a market which is increasingly worried about counterparty risk, how can CDSs simply be assigned to the highest bidder? As I understand it, CDSs are bilateral contracts which can only be assigned with the consent of the other counterparty. If the other counterparty doesn't know who the winning bidder is, how can they give their consent?

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