Can the Credit Default Swap Market Be Salvaged? Issues for Borrowers and Investors

12 Pages Posted: 12 Dec 2015 Last revised: 16 Feb 2016

Richard Christopher Whalen

Economic Advisory Committee of FINRA; Indiana State University - Networks Financial Institute; Association of Private Enterprise Education (APEE); National Association of Business Economists (NABE)

Joe Scott

Kroll Bond Rating Agency

Date Written: November 24, 2015

Abstract

Trading volumes in credit default swaps (CDS) have fallen by more than 75% since the 2008 financial crisis to less than $9 trillion notional amount outstanding as of June 2015. This dramatic decline in volumes comes, in part, because of new laws and regulations focused on reducing the risk of these over-the counter (OTC) derivatives products. Despite significant changes in the regulation of these products, there remain a number of defects in the market structure of OTC credit derivatives, flaws which arguably intensified the impact of the 2008 financial crisis and disadvantage both borrowers and investors. These defects in market structure limit competition, make it difficult for investors to understand the risks taken by large universal banks, create the potential for the manipulation of borrower credit spreads, and even affect the recognition of when default events occur under CDS contracts.

Keywords: Credit Default Swaps, Fraud, Market Structure, Credit Spreads, Regulation, Federal Reserve Board, Commodity Futures Trading Commission, Conflict of Interest, Bankruptcy, Receivership

JEL Classification: D4, D42, D43, E44, G1, G21, G18, K23, L1, L12, L13, L41, N2

Suggested Citation

Whalen, Richard Christopher and Scott, Joe, Can the Credit Default Swap Market Be Salvaged? Issues for Borrowers and Investors (November 24, 2015). Available at SSRN: https://ssrn.com/abstract=2702413 or http://dx.doi.org/10.2139/ssrn.2702413

Richard Christopher Whalen (Contact Author)

Economic Advisory Committee of FINRA ( email )

1735 K Street NW
Washington, DC 20006
United States

HOME PAGE: http://tinyurl.com/2bne6p

Indiana State University - Networks Financial Institute ( email )

Terre Haute, IN 47809
United States

HOME PAGE: http://tinyurl.com/4ckcoxo

Association of Private Enterprise Education (APEE) ( email )

313 Fletcher Hall, Dept. 6106
615 McCallie Avenue
Chattanooga, TN 37403-2598
United States

HOME PAGE: http://https://www.apee.org/

National Association of Business Economists (NABE) ( email )

1920 L St. NW, Suite 300
Washington, DC 20036
United States

HOME PAGE: http://www.nabe.com

Joe Scott

Kroll Bond Rating Agency ( email )

845 Third Avenue
Fourth Floor
New York, NY 10022
United States

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