About a-team Marketing Services
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: The Data Office at a Crossroads — AI Governance, Organisational Design, and the Evolving Mandate of the CDO

Date: 28 July 2026 Time: 10:00am ET / 3:00pm London / 4:00pm CET Duration: 50 minutes Who owns AI governance in a capital markets firm – and is the Data Office structured to bear that weight? These questions sit at the heart of A-Team Research’s latest findings, presented here for the first time: the combined...

BLOG

73 Strings QnA: Solving Post-Investment Data Challenges for Private Markets

Paris-based startup 73 Strings was established to modernise the data and valuation infrastructure for private market participants. Data Management Insight spoke to founder and chief executive Yann Magnan about the company’s operations and its ambitions. Data Management Insight: Hello Yann, when was 73 Strings created and how does it serve financial institutions? Yann Magnan: We...

EVENT

AI in Data Management Summit New York City

Following the success of the 15th Data Management Summit NYC, A-Team Group are excited to announce our new event: AI in Data Management Summit NYC!

GUIDE

AI in Capital Markets Handbook 2026

AI adoption in capital markets has moved into a more disciplined phase. The priority is now controlled deployment: where AI can be used safely, where it can deliver measurable value, and how outputs can be governed, monitored and evidenced. The 2026 edition of the AI in Capital Markets Handbook examines how AI is being applied...