Deutsche Bank launches Event Loss Swaps to help clients hedge against disasters
Deutsche Bank AG today announced the launch of Event Loss Swaps (ELS), a new derivative contract that will enable clients to buy or sell protection against the economic impact of U.S. wind or earthquake disasters. ELS contracts will pay out a pre-determined amount when industry-wide insured losses due to a single US wind or earthquake event exceed specified trigger levels, as determined by an independent third-party agency. Deutsche Bank’s Global Markets division developed the product to provide alternative hedging and investment strategies for clients in the property & catastrophe sector, including reinsurance companies and capital markets investors. Deutsche Bank has begun making two-way markets in ELS contracts and will provide regular quotations to buy or sell ELS protection on standardized terms.
ELS contracts work similarly to Credit Default Swaps (CDS). A buyer of ELS protection pays an upfront premium in exchange for a payout of the contract’s notional value when a wind or earthquake event in the U.S. results in reported industry-wide insured losses that exceed a pre-agreed threshold level. A seller of ELS protection is paid a premium at the contracts inception, but is obliged to pay the buyer the notional amount of the contract when a qualifying loss event occurs. For wind events, which include hurricanes and tornadoes, contracts are available with threshold levels set at $20 billion, $30 billion or $50 billion, and for earthquake events the thresholds are set at $10 billion and $15 billion.
“Event Loss Swaps are an innovative new hedging product that will appeal to clients looking to hedge exposures to U.S. natural disasters in the short-term,” said Boaz Weinstein, Head of Global Credit Trading for the US and Europe. “ELS provide investors with a level of standardization, transparency and liquidity that has not been previously available to this market.”
“This is another important tool we can offer our clients to help them manage their risks, and it gives us more options to create bespoke solutions for our clients with more complex needs,” said Elad Shraga, a Managing Director in Global Credit Trading.
ELS contracts are offered for a standard term of one calendar year in $5 million notional amounts, utilizing ISDA (International Swaps and Derivatives Association) documentation. The 50 U.S. states, Washington DC, Puerto Rico and the Virgin Islands are all covered as “US” jurisdiction under the contracts. When the independent damage assessment period for a loss event extends beyond the standard expiration of an ELS contract, the contract is extended until a final assessment is completed as long as certain interim criteria are met.
For further information, please call:
Ted Meyer 001-212-250-7253
Media Relations, Deutsche Bank
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