The regulatory issues raised by credit default swaps

Mcllroy, David
September 2010
Journal of Banking Regulation;Sep2010, Vol. 11 Issue 4, p303
Academic Journal
This article considers the regulatory issues raised by the increased use of credit default swaps (CDSs). It argues that the current extensive over-the-counter trading of CDSs raises problems in terms of the opacity of risk, misaligned incentives in the event of default by reference entities, and concentrations of counterparty risk, each of which requires addressing. Among the proposals discussed are the standardisation of CDSs, the use of central counterparties, the introduction of exchange trading of CDSs, the imposition of capital penalties on bespoke CDSs or mandatory collateralisation, limiting the extent to which CDSs can be used to hedge a position fully, the prohibition of naked CDS protection and the introduction of large exposure counterparty limits. The article concludes that while standardisation and exchange trading of CDSs should be promoted, mandatory collateralisation is preferable to the use of capital penalties. Naked CDS protection buying should be prohibited unless measures can be put in place to ensure that it does not have adverse effects in the event of default by reference entities. Systemic risk in the CDS markets should be addressed through the introduction of large exposure counterparty limits.


Related Articles

  • COUNTERPARTY CREDIT RISK IN DERIVATIVES. Mercik, Aleksander R. // Research Papers of the Wroclaw University of Economics / Prace N;2015, Issue 381, p264 

    There is currently a strong market focus on counterparty credit risk. CCR is the risk that a party, usually to an OTC derivative contract, may fail to fulfill its obligations, causing re-placement losses to the other party. This is similar to the standard definition of credit risk in the sense...

  • A look at the rapidly changing market infrastructure supporting the OTC derivatives markets. Hollanders, Marc // Journal of Securities Operations & Custody;May2011, Vol. 4 Issue 1, p7 

    Arguably the most important developments in the over-the-counter (OTC) derivatives markets over the last few years are the creation of central trade repositories (TRs) and the introduction of central colinterparties (CCPs). Both play an important role in strengthening the core financial...

  • Reading the tea leaves. Woolcocks, Linda // Credit Management;Jul2013, p41 

    A personal narrative is presented which explores the author's experience of her countdown to be the Credit Manager and over-the-counter (OTC) work stream member.

  • Trouble in store. Sharp, Fiona // Money Marketing;7/29/2010, p31 

    In this article, the author discusses the need to change the flogging of store cards in the general public and the need to outlaw over-the-counter encouragements to apply for credit in Great Britain.

  • Consumer confidence boosting OTC market, NDMA reports. Smith, Elizabeth A. // Drug Topics;4/20/98, Vol. 142 Issue 8, p62 

    Presents information on growth in the over-the-counter (OTC) medicines market, highlighting information from the Nonprescription Drug Manufacturers Association. Comment from chairman Gary S. Balkema; Statistical information on growth in this area; Analysis of a 1997 Bureau of Labour Statistics...

  • Don't Reinvent the Wheel for OTC Rules. Halberstadt, Joe // American Banker;7/27/2012, Vol. 177 Issue F329, p9 

    The article argues U.S. Dodd-Frank Act rules that take effect on October 16, 2012 will help financial institutions recognize and reduce risk in the over-the-counter (OTC) derivatives market by creating transparency, noting the Depository Trust and Clearing Corp. centralizes transaction data.

  • LCH calls for rethink of CCP default funds. Bakie, John // Ai Trade News;2014, p1 

    The article focuses on a white paper released by LCH.Clearnet, European clearing house, over the failure of the loss-absorbing capacity of central counterparties (CCPs) to consider differences between CCP risk and the risk of clearing members. It discusses need of increase in the amount CCPs to...

  • The Network of Counterparty Risk: Analysing Correlations in OTC Derivatives. Nanumyan, Vahan; Garas, Antonios; Schweitzer, Frank // PLoS ONE;9/3/2015, Vol. 10 Issue 9, p1 

    Counterparty risk denotes the risk that a party defaults in a bilateral contract. This risk not only depends on the two parties involved, but also on the risk from various other contracts each of these parties holds. In rather informal markets, such as the OTC (over-the-counter) derivative...

  • Chapter 4: Towards a new crisis resolution regime: The current crisis resolution regime in Norway: Boxes: Central counterparties.  // Financial Stability;Dec2013, p40 

    The article focuses on the importance of central counterparties (CCPs) for over-the-counter (OTC) derivatives and reducing impact of financial crisis for banks in Norway as of December 2013. It mentions the benefits of expanded use of CCPs including analyzing the build-up of risk and reducing...


Read the Article


Sorry, but this item is not currently available from your library.

Try another library?
Sign out of this library

Other Topics