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CDS Auctions: an overview

CDS auctions are the main settlement mechanism for CDS contracts. The auction provides a unique price for the defaulted bond, which directly impacts the amount that the protection seller needs to pay the protection buyer if a credit event occurs. In this way, CDS auctions have direct influence on payouts in the CDS market, a market that had approximately $10 trillion in contracts outstanding by the end of 2007. Considering the size of the CDS market, understanding how CDS auctions function is extremely important for CDS users and regulators.