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Feature: CDS clearing offers way forward
08 February 2010
The CDS market appears to be emerging from the darkness with the help of CDS clearing houses
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[CDS]
[clearing houses]
[CDO]
[CME]
[ICE]
The credit default swap market, which had previously enjoyed a reputation as being a secure way of laying off counterparty risk, was badly tainted during the global financial crisis.
The business had grown at a rapid rate over the years, developing into a trading business where credit is given at one price and then it turns in the counterparty’s favour and an opportunity arises to buy credit risk from someone else – therefore locking in a spread.
With such rapid growth the business progressed with no real regulatory oversight. Banks relied on one another’s credit and the product was not standardised. Transactions were often done over the phone and terms were thrashed out there and then.
The calls for regulation of the market were quick and loud following the well publicised problems at some of the world’s largest financial institutions. The main issues brought into focus surrounded counterparty risk,...
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