Credit derivatives on an underlying asset could be worth multiple orders of magnitude more than the asset because all asset-backed derivatives settled in cash.

Two parts are tested. (a) Credit derivatives (CDS or synthetic CDOs) referencing a single asset-backed security could have a total notional many times larger than the asset itself, up to orders of magnitude (at least about 10x, potentially 100x or more). (b) Cash settlement, where no physical delivery of the underlying bond is needed (for example under ISDA pay-as-you-go terms), is what made this possible. True: documented cases or market analysis show notional far exceeding the underlying, by an order of magnitude or more, and that this was enabled by cash settlement, which was standard for these contracts. Mostly true: both parts hold but the multiples documented are smaller than 'orders of magnitude' (for example several-fold), or cash settlement was the norm but not universal ('all' overstated). Mixed: one part holds and the other is unsupported. Mostly false: notional did exceed the underlying, but the evidence shows cash settlement was not the mechanism or was not common. False: notional on asset-backed credit derivatives could not exceed the underlying asset, or settlement was physical in a way that capped it.

Set before the research began.

1. E1 Credit Derivatives and Risk Management Federal Reserve Board, Finance and Economics Discussion Series (Michael S. Gibson) · 22 May 2007

   “As the credit derivative market has grown, it is now common for the notional amount of CDS outstanding referencing a particular issuer to be larger than the face value of the issuer's bonds outstanding. In October 2005, Delphi Corporation defaulted with $2 billion of deliverable bonds and approximately $28 billion of credit derivatives outstanding.”

2. E2 Credit Default Swaps and Their Market Function Federal Reserve Bank of Cleveland (Economic Commentary) · 9 July 2009

   “Consequently, the total value of CDS contracts can (and frequently does) exceed the amount of outstanding debt being insured.”

3. E3 Credit Derivatives and Risk Management Federal Reserve Board, Finance and Economics Discussion Series (Michael S. Gibson) · 22 May 2007

   “In the wake of the Delphi default, dealers rushed to organize a cash settlement auction in which more than 570 counterparties participated.”

4. E4 Documenting credit default swaps on asset backed securities Mayer, Brown, Rowe & Maw LLP (Euromoney Structured Credit Products Handbook 2007/08) · April 2007

   “another (Form II) is intended for asset-backed securities (ABS) generally and does not include a physical settlement option;”

E1 records Delphi's 2005 default with about $28 billion of CDS outstanding against $2 billion of deliverable bonds, about 14x, and E2 says total CDS value can and often does exceed the debt being insured. That supports notional far exceeding the underlying by about one order of magnitude, but these examples are corporate CDS, not single asset-backed securities. E3 describes a cash settlement auction after Delphi, and E4 shows an ISDA template for asset-backed securities that has no physical settlement option. Together they support cash settlement as the mechanism, but E4 also implies that other templates did offer physical settlement. So "all" is overstated, and "multiple orders of magnitude" for asset-backed securities is not directly documented.