The cost of default protection on Deutsche Bank has fallen sharply following the introduction of new derivatives contracts used to insure against German bank failures.
Clients and traders use the prices of credit default swaps as a general barometer of a bank’s health. They also buy CDS to manage exposure from trading derivatives and other financial instruments with a bank. The new CDS are tied to Deutsche bank’s senior-preferred bonds, the highest-ranking senior security. Previously, traders could only use swaps tied to Deutsche’s non-preferred bonds, which are designed to absorb losses if the bank is wound down.
Deutsche senior CDS spread was around 99 basis points on May 14. The spread, when tied to the senior non-preferred bonds, was 178 basis points on May 10, according to IHS Markit data. This will lower the cost for counterparties hedging exposures to Deutsche Bank and more accurately reflect the position for counterparties and clients in the hierarchy of creditors,” said James von Moltke, Deutsche’s chief financial officer, in a statement on May 13. “It also creates a level playing field for German Banks versus their EU and US peers.”