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CDS = OSS? February 1, 2009

Posted by James Webster in : finance, development , trackback

J.P. Morgan has taken the step to donate their CDS pricing code to ISDA, the International Swaps and Derivatives Association (via Finextra, see the ISDA press release).

The motivation around this move is to demonstrate the credit market players’ greater willingness to ensure transparency around the pricing of credit default swaps. Many derivatives houses consider their in-house analytics to be the ’secret sauce’ that makes their pricing and risk management better than the rest of the Street.

This news arrives as the US Congress consider a proposal to ban ‘naked’ CDS trading; that is it would be illegal to buy CDS protection unless you actually hold the bond for which you want protection against the issuer’s default (i.e. the loss of your principal). If this ban did go ahead then CDS trading volumes (and profits) would be dramatically reduced, assuming that legal jurisdictions outside the US follow suit.

I’ll stay out of the economic, social and moral debates about whether eliminating naked CDS trading is a good idea or not. Here are some of the questions I have surrounding the release of this code as open-source software:

  1. What is the timeframe for making it available? No detail appears on the ISDA press release but if the motives are primarily political then it ought to happen sooner rather than later?
  2. What sort of open source license will the code be made available under? What terms and conditions surrounding its use (and potentially profiting from it) will come attached?
  3. Will a Sourceforge or Github-style repository be set up around the codebase or will it simply be a case of downloading a zip of C++ code from an ISDA server?
  4. Some quantitative analytics libraries are tied to the market data and risk systems that surround them so it will be interesting to see how clean the interfaces are.
  5. Putting the code to work on an Amazon EC2 grid to stress test a CDS portfolio might be an interesting exercise.

Any discussion of quantitative financial analytics and open-source would be remiss in not mentioning Quantlib; the original (and only?) open-source quant finance library.

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