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Settling in this week…

Here’s a heads-up on two events (among many) that could potentially affect market volatility this week. Final payments on settlement of credit default swaps (CDSs) on Lehman Brothers debt are scheduled to be made Oct. 21. Two days later, on Oct. 23, the auction for CDSs on the debt of Washington Mutual will occur. The auction will help determine the value of those CDSs, and how much the companies that wrote that protection against WaMu’s defaulting on its bonds will owe. A similar auction for the Lehman CDS was held Oct. 10.

The two events should give institutional investors and financial institutions a better handle on who owes how much money and to whom as a result of the collapse of the two large companies. There’s some debate about the ramifications of these events in terms of the markets. However, it’s worth noting that the Oct. 10 Lehman auction came at the end of one of the worst stock market weeks in history, and the Friday of the auction was the day on which the Dow experienced a 1018-point move from the low to the high.

Regardless of whether the settlements actually prove to be significant in themselves, if enough institutional investors believe they will be, it could mean more volatility ahead this week–in either direction–especially for the financial sector. For more information about the process for CDS settlements, you can check out the web site for the International Swaps and Derivatives Association.

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