CDS Conventional Quotes and the Legacy Role of Par Spreads

Summary

The response distinguishes historical par spreads from modern standard CDS market quoting. Par spreads describe the spread associated with a contract that has no upfront fee, as used before the 2009 CDS contract changes. Current trading generally uses a standard running coupon together with an upfront payment, while many instruments are summarized using a conventional spread that is close to the par spread.

The practical advice is to use the conventional market quote for analysis rather than convert it into a par spread, unless compatibility with an older system or library requires the legacy measure. Some very high-yield names may instead be quoted upfront. The answer does not explain how to calculate a par curve from sector and rating data, nor does it provide a curve-construction method or validation evidence. Its scope is a conceptual distinction between quote conventions and a recommendation about which measure to use in ordinary contemporary analysis.

Key ideas

• Par spreads correspond to a CDS structure with no upfront payment, a convention associated with pre-2009 trading.
• Modern CDS trades generally pair a standard running spread with an upfront fee.
• Conventional spreads are close to par spreads for many names, but some high-yield cases use upfront quotations.
• Market-standard conventional quotes are generally preferable to legacy par spreads unless system compatibility requires conversion.

Tags

# CDS Par Curve construction from sector Quoted curve


# CDS Par Curve construction from sector Quoted curve












Recently I was given a dataset containing sector/rating CDS spreads curves. The methodological document says that after estimating de Quoted Spread from the data, they obtain the Par Spread curve. For instance, the dataset looks something like this:

| Sector | Quoted | Par | CPD | Rating | Tenor |
| Industrials | 200.386 | 200.366 | 1.2 | AAA | 0.5 |

I don't know how they do this and I would really appreaciate if any one could help me figure it out. Thanks in advance.

## Answer by Dimitri Vulis (score 1)

https://quant.stackexchange.com/a/73778

A "par curve" shows how people used to trade CDS with zero upfront fee before the 2009 Big Bang. But no one trades CDS like that any more. They trade with standard running spread, like 100 bps, and upfront fee. For convenience, most names are quoted as the conventional spread, which is very close to the par spread. But a few very high yield names (like Venezuela before the default :) are quoted as upfront. See, for example, BIS Quarterly Review, December 2010 p 65, and MarkIt, The CDS Big Bang: Understanding the Changes to the Global CDS Contract and North American Conventions (2009)

In my opinion, no one should be using par spreads anymore, except for backward compatability with bad legacy libraries and IT systems. If you have the conventional spread (market standard quote), use it and disregard the par spread.

Related questions

Which spread to use to analyse CDS data from Markit

CDS Quote Conversion - Quoted vs Par

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