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Re: Credit default swap

By: oldCADuser in FFFT | Recommend this post (0)
Sat, 05 Nov 11 7:25 PM | 68 view(s)
Boardmark this board | Food For Further Thought 		Msg. 35589 of 65535
(This msg. is a reply to 35588 by clo)
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"However, there is a significant difference between a traditional insurance policy and a CDS. Anyone can purchase a CDS, even buyers who do not hold the loan instrument and may have no direct "insurable interest" in the loan. The buyer of the CDS makes a series of payments (the CDS "fee" or "spread") to the seller and, in exchange, receives a payoff if the loan defaults."

This sounds amazingly like when someone takes a side-bet in a game of craps. You're not the guy holding the dice, but you're still making a bet on the what the outcome of the throw is going to be.




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The above is a reply to the following message:
Credit default swap
By: clo in FFFT
Sat, 05 Nov 11 3:45 PM 		Msg. 35588 of 65535

Why haven't these been banned? Haven't we learned the damage these have created....

Credit default swap

A credit default swap (CDS) is similar to a traditional insurance policy, in as much as it obliges the seller of the CDS to compensate the buyer in the event of loan default. Generally, the agreement is that in the event of default the buyer of the CDS receives money (usually the face value of the loan), and the seller of the CDS receives the defaulted loan (and with it the right to recover the loan at some later time).[1]

However, there is a significant difference between a traditional insurance policy and a CDS. Anyone can purchase a CDS, even buyers who do not hold the loan instrument and may have no direct "insurable interest" in the loan. The buyer of the CDS makes a series of payments (the CDS "fee" or "spread") to the seller and, in exchange, receives a payoff if the loan defaults.

Credit default swaps have existed since the early 1990s, and increased in use after 2003. By the end of 2007, the outstanding CDS amount was $62.2 trillion[2], falling to $26.3 trillion by mid-year 2010.[3] 


Most CDSs are documented using standard forms promulgated by the International Swaps and Derivatives Association (ISDA), although some are tailored to meet specific needs. CDSs have many variations.[4] In addition to the basic, single-name swaps, there are basket default swaps (BDSs), index CDSs, funded CDSs (also called a credit-linked notes), as well as loan-only credit default swaps (LCDS). In addition to corporations and governments, the reference entity can include a special purpose vehicle issuing asset backed securities.[5]

CDSs are not traded on an exchange and there is no required reporting of transactions to a government agency.[6] 
During the 2007-2010 financial crisis the lack of transparency became a concern to regulators, as was the multi-trillion dollar size of the market, which could pose a systemic risk to the economy.[7][4][8][9]

Credit default swaps and other derivatives are unusual--and potentially dangerous--in that they combine priority in bankruptcy with a lack of transparency.[7] 
In March 2010, the DTCC Trade Information Warehouse (see Sources of Market Data) announced it would voluntarily give regulators greater access to its credit default swaps database.[10]

A number of financial professionals, regulators, and the media have begun using credit default swap pricing as a gauge of the riskiness of corporate and sovereign borrowers, and U.S. Courts may soon be following suit. [1]

much more:
http://en.wikipedia.org/wiki/Credit_default_swap

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