CBOE Credit Event Binary Options

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Credit Event Binary Options (CEBOs) translate credit default swaps (CDS) into a transparent, exchange-traded marketplace. The Chicago Board Options Exchange (CBOE) originally launched credit default options in mid-2007, but re-launched the options with several modifications in March 2011.[1] [2]

Initially CEBOs were binary options that payed fixed amounts when a credit event occured such as when a company experienced a bankruptcy, a failure to pay or a restructuring. Currently, the CBOE's re-designed contracts are streamlined to include bankruptcy-only credit events.

CEBOs are similar to fixed recovery credit default swap contracts but are exchange traded, and can be purchased with an upfront premium that can be margined. Investors receive a pay-out if the credit event occurs or nothing, if the event does not happen.

Credit derivative products have drawn much attention recently due to the 2008 credit crisis, and regulators and market participants have called for better means to moderate systemic risk. The CBOE believes that by creating a tradeable listed credit derivative product, they can provide additional benefits to the customer and the industry though transparency, counterparty risk protection, and operational efficiencies.[3]

Advantages

Transparency

  • Terms are simplified and payout determinations are objective and predetermined.
  • Trading environment allows for price discovery and certainty of execution.

Counterparty Risk Protection

  • Virtual elimination of counterparty risk; all trades are cleared by the AAA-rated Options Clearing Corporation (OCC).
  • Regulated exchanges delivered as promised during the recent crisis: no failures, no closures, no taxpayer rescues.

Operational Efficiencies

  • Trades are executed through securities accounts allowing synergies with equity-related options products.
  • NO ISDA Agreements required.
  • Hybrid trading platform (floor-based or electronic) and CFLEX eligible.
  • CBOE plans to list CEBOs with a broad universe of corporate names and potential maturities.

References

  1. CBOE Plans CDS Challenge With Credit-Default Options. Businessweek.
  2. CBOE Adds Five New Credit Event Binary Options. Futures Magazine.
  3. Introduction to CBOE Credit Option Complex. CBOE.