April 5 (Bloomberg) -- Trading of municipal credit default swaps surged April 3 in the first session using new standards for contracts in the market, according to Markit Credit Group Ltd.
Transactions in a CDS index representing the credit of state and local governments totaled a gross notional $684 million that day, compared with a monthly average of about $100 million, according to Markit, which compiles data on the swaps.
The jump suggests the “changes have generated additional interest in the products,” Otis Casey III, director of credit research for Markit in New York, said in an e-mailed report yesterday.
The swaps are bets on whether issuers will fail to make payments on debt sold in the $3.7 trillion municipal bond market. The goal is to bring contracts on state- and local- government securities in line with those set up in 2009 for corporate and sovereign debt, according to the International Swaps and Derivatives Association in New York.
The changes apply so-called auction-settlement terms to transactions. The shift makes the swap contracts easier to trade and puts decisions, such as when a credit event occurs or a payout is triggered, under a committee of banks and money managers. ISDA, as the group is known, sets guidelines for over- the-counter trading of derivatives.
The changes may have helped boost prices for some state indexes, Casey said. The price of a 10-year Illinois contract rose about 16 percent since April 2 and the cost for California climbed 13 percent, according to data compiled by Bloomberg. The generic 10-year municipal CDS price rose 2 percent.
The surge can be attributed to changes in the contract terms, Casey said in a phone interview.
“Because of changes in the standards, the numbers aren’t comparable,” he said.
The price change has nothing to do with credit quality, said Mikhail Foux, director of credit derivatives and municipal strategy for Citigroup Inc. The increase was “technical in nature” and was caused by the shift to new contract rules, he said.
The higher price “has created the false impression that our bonds are somehow less creditworthy,” Tom Dresslar, a spokesman for California Treasurer Bill Lockyer, said in an interview. “There is absolutely no justification for that.
“It’s just another example of why taxpayers and issuers, anybody outside of Wall Street and their corporate clients, should view this market with a healthy dose of skepticism.”
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