Book Trades for Credit Default Swaps

In the Credit Default Swap/Lock Security panel, you can manually book open and close trades for a credit default swap. A credit default swap is a credit derivative that is designed to transfer the credit exposure of fixed income products between parties. The buyer of a credit default swap receives credit protection, while the seller of the swap guarantees the credit worthiness of the product. This means that the risk of default is transferred from the holder of the fixed income security to the seller of the credit default swap. All credit default swap positions are established as long positions regardless of whether the contract is a buy or sell protection.

You can add a clean market value or dirty market value for the credit default swap. The system calculates the clean unit price for a particular effective date when you trigger the Calculate Clean Unit Price process in the Global Process Center. See the About Clean and Dirty Market Prices page for more information.

Exchange cleared credit default swaps calculate both income and variation margin daily. Trade processing does not create a cash movement and the cost is notional. The system handles both full and partial terminations. To calculate and approve the variation margin, see the Calculate and Approve Variation Margin page.

This article assumes you are familiar with the entity and security level elections that have been made for processing a credit default swap. For example, you must enter a value for the Swap Accrual Method field. If you set this field to Income/Expense, the system posts interest accruals and dividends to income/expense accounts in the general ledger. If you set this field to Unrealized, the system posts interest accruals and dividends to unrealized capital accounts in the general ledger. You can access this field using the Add/Change Entity and Add/Change Master Fund Setup panels. Also, if the Primary Amortization/Accretion Rule field is not set to Straight Line, Straight Line Actual, or None, you must set up the Amortization/Accretion Rule at the processing security type level. You can access this field using the Add/Change Amortization/Accretion Rules panel.