Credit Derivatives: Systemic Risks and Policy Options?
International Monetary Fund (IMF), 2009 - Credit derivatives - 35 pages
Credit derivative markets are largely unregulated, but calls are increasingly being made for changes to this "hands off" stance, amidst concerns that they helped to fuel the current financial crisis, or that they could be a cause of the next one. The purpose of this paper is to address two basic questions: (i) do credit derivative markets increase systemic risk; and (ii) should they be regulated more closely, and if so, how and to what extent? The paper begins with a basic description of credit derivative markets and recent events, followed by an assessment of their recent association with systemic risk. It then reviews and evaluates some of the authorities' proposed initiatives, and discusses some alternative directions that could be taken.
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Should CDS markets be regulated more closely?
Summary and Conclusions
500 basis point authorities bankruptcy Bid/Asked Spread Big Bang bilateral billion cash settlement protocol CCP for CDS CDS contracts CDS market CDS trades CDSs central counterparty Citigroup clearinghouses collateral collateralized debt obligations counterparty credit risk counterparty risk coupon credit default swap credit derivative contracts credit derivative markets credit derivative transactions credit event deliverable obligations detail disclosure DTCC DTCC data ensure Eurex European gains/losses gross notional ICE Trust improvements increase systemic risk index-based institutions investors ISDA jurisdictions Lehman Brothers liquidity liquidity risk margin requirements market abuse market participants master netting arrangements maximum multilateral netting notional amounts novation operational risks opt-in OTC derivatives markets outstanding oversight Points CDS Level portfolio positions potential premia protection buyer protection seller recent recovery rates reference entity regulators regulatory arbitrage restructuring event risk management settlement risk standardized systemic counterparty systemic importance Tabular presentation tearups Trade Information Warehouse transparency trillion upfront payments valuation