The term "DK" is "Don't know" in trader parlance. To DK a trade is to deny it ever existed. The credit default issue seems to be spawning a lot of fear about who really owns the hot potato.
Unless the world has changed since I stepped off a Wall Street desk, the answer is all the people in the chain. This is an explanation of why everyone is worried about how big the dominoes are and why they could set off a chain reaction. let me explain.
There are two ways to get a contract "off your books" but only one way to get out of the contract. A lot of what is being talked about in the credit default issues confuses selling a risk from getting rid of the risk.
More below:
When a trader enters into a MBO or CDO or any other of the alphabet soup of derivative trades, he or she buys or sells the product. If an investment bank issues a derivative, they merely handle the paperwork (taking a tidy fee) but are never in the chain of title. (Nifty little legal term that with a big bark and bigger bite).
So what is the difference and what does it have to do with the two ways to get a contract off your books.
Ok - if the trader buys or sells a product - they are in the chain of title. In that case, they have two ways - as I said - to get out of the risk. One is to do the reverse (sell if the bought or buy of they sold) trade with someone else. It that case, they have bought 100 pieces of product a and sold 100 pieces of product a. See, look Ma, no risk. Not so fast buddy.
What you now have is an obligation to pay someone and a right to get paid by someone. What you have is a credit risk that the person (Peter) will pay you the money you owe the other guy (Paul). Under US accounting rules, if I have bought and sold the same product for payment at the same time, I am allowed to exclude the value off my book. Or, even better, if I borrow from Peter at $3 and sell to Paul at $5, I am allowed to claim the $2 profit now. But if Paul fails to show up with the money, I still owe Peter $3.
If I assign the contract with Peter to Paul - and Peter agrees - then if Paul fails to pay, Peter can't come to me and demand payment. But if I assign it, I don't get to sell it at a profit. You don't trade for "scratch" in the industry parlance and I would bet that less than 1/10 of 1/100th of 1% ever get assigned.
But please note what happens in the buy/sell and why that is so important to today's credit crunch.
Let's say I bought $1 billion in mortgage backed obligations (MBOs). And let us say two months later I sold them for $1.2 billion. Ok, here is the fun part - I am allowed on the next day to claim that $200 million as "mark to market" profit. And since there is a confirmed buy and sell those are called "liquidated positions" and that profit goes into this year's bonus pool.
Now in the daisy chain of finance, this set of transactions can happen eight or nine times. Now, the credit crunch and downgrades happen. Everyone has to write down their trades - but since the right down loss on the buy is covered by a gain on the sale, the net profit impact is zero.
But, if the last guy in the chain says "No Mas" and defaults - then the person who sold him the product has to restate the deal. In this case, all the "captured" profit goes away and the write down on the buy is no longer covered by a "write up" on the sale. So, in our example, if I bought $1 billion and the guy a sold to defaults, I have to write down the $200 million profit plus - especially if Ambac is bankrupt - I may have to write down the $1 billion. If I default, the next guy does the same thing. The domino effect people are concerned about is if that write down then causes the next link in the chain to fail, etc., etc. And the total write down is the base amount plus all booked profits.
And not, the traders who made the most profits in this area (look at the earnings statements of Wall Street over the last five years and find the likely victims) are also those that take the biggest leverages on the write downs.
Anyway, a little explanation of the credit crunch.