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Is three a crowd?
04 August 2008
The introduction of a central counterparty to CDS and even CFD trading later this year, under an approving regulatory eye, is going to revolutionise the market. But people need to be careful that the complicated procedure of inserting a middleman into these traditionally bilateral over the counter markets doesn't add a risk of its own. Marek Sanders reports.
Default, default, default – a worryingly common word in financial circles today. News of it, fear of it, or near misses-but rescued from the mouth of it pepper press stories and regulatory announcements every month on both sides of the Atlantic as the credit crisis continues to find fresh wind and take its unpredictable toll.
Naturally in this environment the biggest concern of the year in many markets has become counterparty risk, not least in the Credit Default Swap (CDS) market – the biggest over the counter (OTC) credit derivative market, and one commonly used to create synthetic prime brokerage trades, attractive for the consummate ease with which it can do so. In fact, CDSs are so attractive a route to financing trades that the global market has reached an estimated size of $62 trillion. The counterparty default scares that we have seen have had regulators worried for some time that...
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