The International Swaps and Derivatives Association has published standard documentation for the use of recovery lock credit derivative transactions, a move that could help boost trading of the product. A spokeswoman at ISDA said work on the standard documentation began a couple of months ago at the request of members.

James Batterman, analyst at Fitch Ratings, said the market for recovery lock credit derivatives, or recovery swaps, is still small. Trading of the product only started in 2005 and is confined to distressed names, mostly those that appear close to default. Another analyst at a ratings agency said recovery swaps have traded on General Motors Corp.

Recovery swaps are different from plain credit default swaps in that the buyer and seller agree on a recovery rate when the contract is entered into. Recovery swaps have the advantage of allowing investors the certainty of a fixed recovery, whereas with ordinary CDS, recoveries are unknown. One disadvantage for the seller is that after the credit event, a security may trade above expectations, making the investor lose out if the set recovery is less than the trading level of the security. Batterman added that the market for recovery swaps is only likely to grow if the default rate picks up.