This price – called the recovery value – will in turn determine the payouts that have to be made by insurers and banks which offered credit cover on the mortgage financiers in recent months.
Unwinding and settling these derivatives will be the biggest test yet for the thus-far unregulated $54,000bn credit derivatives market, which is likely to be brought under stricter supervision amid concerns from regulators that its exponential growth helped fuel the credit bubble.
The breakdown of large parts of the credit markets has raised concerns about the ability to settle the derivatives contracts, as pricing is determined by the bonds which are eligible for use in the derivatives settlement auctions.
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