What were the 2009 CDS Big Bang and Small Bang conventions and why did they matter?

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AcadiFi · Accepted Answer

The 2009 Big Bang (April, North America) and Small Bang (July, Europe) protocols standardized the CDS market in response to counterparty risk revelations during the 2008 financial crisis. Before these conventions, CDS contracts had heterogeneous terms, making netting, central clearing, and valuation difficult. The reforms dramatically improved market infrastructure. Key changes from the Big Bang: (1) Standardized coupons — North American single-name CDS quote with fixed 100 bps (for investment grade) or 500 bps (for high yield) running premiums, with the difference versus fair spread settled upfront. Before, each contract had bespoke coupons. (2) Determinations Committees — regional ISDA DCs now rule on whether credit events occurred, succession events, and auction mechanics, replacing ad hoc bilateral determinations. (3) Hardwired auction settlement — the auction protocol became an automatic part of standard documentation rather than requiring separate opt-in. (4) Rolling effective dates — trades now use standardized effective dates (20th of Mar/Jun/Sep/Dec) rather than contract-specific ones, dramatically improving fungibility. (5) Restructuring clause changes — North American IG moved to 'No Restructuring' as standard, while Europe retained Modified Modified Restructuring under the Small Bang. ```mermaid flowchart TB PRE[Pre-2009
Bespoke Terms] --> BB[Big Bang
April 2009] BB --> SC[Standard Coupons
100/500 bps] BB --> DC[Determinations
Committees] BB --> AS[Hardwired
Auction] BB --> CL[Central
Clearing Ready] ``` These reforms enabled central clearing (ICE Clear Credit, LCH CDSClear), reduced systemic counterparty risk, and increased market transparency. CFA candidates need to understand these as foundational modern market structure.

What were the 2009 CDS Big Bang and Small Bang conventions and why did they matter?

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