Credit Default Swaps and Insurance: Against the Potts Opinion
Journal of International Banking Law and Regulation, Vol. 26, No. 3, pp. 128–135, 2011
18 Pages Posted: 6 Mar 2011 Last revised: 6 Jun 2011
Date Written: November 25, 2010
Little attention has been given to the possibility that CDS transactions might be construed as insurance contracts in English law. This article challenges the widespread “Potts opinion”, which states that CDSs are not insurance, because they do not require the protection buyer to sustain a loss or to have an insurable interest in the subject matter. CDSs often do provide protection against loss that the buyer is exposed to; loss indemnity is not a necessary characterisation of an insurance contract; insurable interest does not form part of the definition of insurance, but is an additional requirement of valid insurance; and what matters is the substance not the form of the contract. The situation in the US and Australia is also briefly considered.
Keywords: Credit default swaps, credit derivatives, insurance law, Potts opinion, Dodd-Frank Act
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