According to a Financial Times article, a European commission examining the credit derivatives industry is asking CDS traders to reduce risk. Ah, if it was only that easy. Kind of like asking someone running a garage sale in the 1980s to sell their old eight-track player for what they paid for it. For one, you are not going to get your original value back, and two, very few people are interested in buying something that may be worthless tomorrow. It is also kind of ironic how we need to reduce risk on the very item we were using to reduce risk in the first place. At some point you cannot just keep passing risk along. Someone has to bear it - which is unfortunately where the government steps in when such exposure is contagious. Fortunately, besides asking for the obvious (and possibly impossible), the commission is forcing its hand a little, stressing how they want a clearinghouse for credit derivatives - otherwise legislation could be introduced. If that is not enough to put the fear in the industry, I am not sure what else is.

1 comments

  1. John // October 25, 2008 at 4:16 AM

    Regulations are back, but not without any signification reason. Government should keep an eye on the CDS slot and hold speculative trades in it as it has been. The $60 trillion market is a great space to watch for. The reason why the CDS market works is if the markets antagonize you tomorrow, you can scale back your positions immediately. If the CDS positions are static and people will not be able to change the positions as per the market, the total losses would phenomenal.

    John
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