Moody's claims documentation affects recovery values
Recovery values assigned to a single reference entity in credit derivatives contracts are inconsistent, partly due to a lack of standardised valuation documents, according to Moody’s Investors Service.
Moody's believes the reporting of the valuation process should be standardised to bring about greater consistency of settlement prices in cash-settled synthetic securities and a set of standardised valuation notices should accompany each declared credit event.
Such measures should include: limiting valuation obligation characteristics to avoid the use of particularly illiquid instruments; setting at least one 'fall-back' valuation date if the minimum of two bids is not available on the first valuation date; soliciting, at each valuation date, five dealers unaffiliated with the calculation agent and with one another so as to minimise the risk of moral hazard; and recording and reporting the valuation process in a standardised form.
“The increased transparency resulting from the adoption of these notices should contribute to a narrowing of the range of recoveries assigned to a given reference obligation upon settlement of a declared credit event,” Moody’s said.
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