Credit Default Swaps -new regulations and conversion problematics

Abstract

During the financial crisis, focus on Credit Default Swaps has increased and their contribution to the crisis has been widely discussed. As a result regulators introduced the big bang protocol during 2009 to regulate the CDS market. A major change is that of fixed spreads, which means conversions of running spreads needs to be made. However the methodology of conversion proposed by ISDA might include problems if used outside its proposed context. The purpose of the present study is to underline what changes has been made to the CDS market as well as to compare two methodologies, namely a fixed hazard rate model and a piecewise constant hazard rate model, for conversion.