What is a conventional CDS spread and how does it differ from the par spread?

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AcadiFi · Accepted Answer

The conventional CDS spread is the par-equivalent running spread computed using the ISDA Standard Model with fixed conventions: a flat hazard rate, fixed recovery (40% for senior unsecured North American corporates), and the ISDA-published discount curve. It's conventional because everyone agrees to use the same simplifying assumptions to ensure quotes are comparable. The par spread, more broadly defined, is any running spread that makes a CDS zero-PV under any given term structure — it could use a term-structured hazard rate calibrated to multiple maturities. In practice, dealers quote the conventional spread because it's unambiguous: input the upfront, running coupon, effective date, maturity, and accrual conventions, and the model outputs a unique number. Two desks computing the conventional spread for the same Polaris Nexus Energy contract should get identical results to the basis point. The par spread, if computed with a full term structure, might differ slightly because it reflects the actual shape of the issuer's credit curve rather than assuming flatness. For most single-name trading, the conventional spread is the working standard. For index and portfolio work, dealers use full term-structure models. FRM tests both concepts, and you should recognize that the 'standard' quotes you see on Bloomberg or Markit are conventional spreads with the 40% recovery assumption baked in.

What is a conventional CDS spread and how does it differ from the par spread?

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