The Credit Default Swaps Market: Areas of Vulnerability and Regulatory Responses

Abstract

This document analyses the credit default swap (CDS) market, paying special attention to the main problems affecting the operation of this market and the various regulatory initiatives recently set in motion. With regard to the structure of this OTC (over the counter) market, the supply is highly concentrated in a few entities, which seems to condition both the level of transparency and the management of counterparty risk. In this context, we analyse the proposed regulatory amendments initiated in the USA and Europe which, on the one hand, help increase the transparency of transactions and will lead to a better supervision of the participating entities and more efficient price formation, and, on the other hand, help reduce counter-party risk by clearing standardised contracts in central counterparties (CCPs) and improve bilateral risk management for contracts which, due to their nature, cannot be cleared in CCPs. Lastly, we evaluate the advisability and effectiveness of restricting the naked buying of CDS.