About a-team Marketing Services
The knowledge platform for the financial technology industry
The knowledge platform for the financial technology industry

A-Team Insight Blogs

Pricing Partners Highlights Issues with Recovery Rate Assumptions for CDSs

Subscribe to our newsletter

Valuations provider Pricing Partner has been talking up its new service aimed at providing greater accuracy around recovery rate assumptions for credit default swaps (CDSs). The vendor claims that the financial crisis has highlighted the inaccurate modelling assumptions that have been used as the basis for valuations for these credit derivatives.

Eric Benhamou, CEO of Pricing Partners, explains: “There has been a lot of noise around inaccurate modelling assumptions for the simplistic Gaussian copula model for collateralised debt obligations (CDOs). This is very true but we are surprised that there is much less shout about the inaccurate standard 40% recovery rate assumption.”

The vendor claims that the Lehman default has brought to light the fact that the standard 40% recovery rate assumption for CDS market was “very optimistic”. These derivatives have instead recovered only 5% of their notional value and this has thrown into doubt the fair level for recovery rates, says Benhamou.

In order to deal with this perceived inaccuracy, the vendor has altered its valuations methodology by backing the recovery rate from the underlying bond of the CDS. “We have revisited all our CDS market data to provide more accurate valuation. Backing out the CDS recovery rate is in fact a way to relate the CDS and the bond market, with some liquidity spread between these two,” says Behhamou. “For those market participants who have not revisited their CDS recovery assumptions, we expect a substantial P&L impact.”

He reckons that as an independent valuation provider, it is Pricing Partners’ role to question market inputs and revisit them when it thinks they are not realistic. The impact of such an inaccuracy can be significant, Behnamou claims. “Diminishing CDS recovery rates leads mechanically to lower valuation on credit derivatives. For distressed bonds, backing out CDS recovery from the bond market can lead to a recovery rate as low as 5-15%. This is very different from the 40% we saw before the crisis,” he says.

Subscribe to our newsletter

Related content

WEBINAR

Upcoming Webinar: End-to-End Lineage for Financial Services: The Missing Link for Both Compliance and AI Readiness

8 October 2025 10:00am ET | 3:00pm London | 4:00pm CET Duration: 50 Minutes The importance of complete robust end-to-end data lineage in financial services and capital markets cannot be overstated. Without the ability to trace and verify data across its lifecycle, many critical workflows – from trade reconciliation to risk management – cannot be...

BLOG

Mainframes’ Utility in Deriving Value from Data Endures: Webinar Review

Despite advances in modern data architecture and hosting strategies, a majority of financial firms still house more than half of their data on mainframes, presenting them with novel data management pressures, an A-Team Group webinar discussed. Capital market participants and data professionals who viewed the event – entitled Are you making the most of the...

EVENT

RegTech Summit London

Now in its 9th year, the RegTech Summit in London will bring together the RegTech ecosystem to explore how the European capital markets financial industry can leverage technology to drive innovation, cut costs and support regulatory change.

GUIDE

AI in Capital Markets: Practical Insight for a Transforming Industry – Free Handbook

AI is no longer on the horizon – it’s embedded in the infrastructure of modern capital markets. But separating real impact from inflated promises requires a grounded, practical understanding. The AI in Capital Markets Handbook 2025 provides exactly that. Designed for data-driven professionals across the trade life-cycle, compliance, infrastructure, and strategy, this handbook goes beyond...