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Credit Derivatives

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Author Info

  • John Kiff
  • Jennifer A. Elliott
  • Elias G. Kazarian
  • Jodi G. Scarlata
  • Carolyne Spackman

Abstract

Credit derivative markets are largely unregulated, but calls are increasingly being made for changes to this "hands off" stance, amidst concerns that they helped to fuel the current financial crisis, or that they could be a cause of the next one. The purpose of this paper is to address two basic questions: (i) do credit derivative markets increase systemic risk; and (ii) should they be regulated more closely, and if so, how and to what extent? The paper begins with a basic description of credit derivative markets and recent events, followed by an assessment of their recent association with systemic risk. It then reviews and evaluates some of the authorities'' proposed initiatives, and discusses some alternative directions that could be taken.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 09/254.

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Length: 35
Date of creation: 01 Nov 2009
Date of revision:
Handle: RePEc:imf:imfwpa:09/254

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Keywords: Financial stability; Asset management; Credit risk; Financial instruments; Securities regulations; derivative; credit derivatives; derivative markets; credit derivative; bonds; investors; financial statements; derivative transactions; bond; derivatives markets; financial markets; margin requirements; risk exposure; hedge; commodity futures; derivatives transactions; derivative instruments; disclosure requirements; equity derivative; regulatory framework; cash flows; derivative contracts; prudential regulation; financial derivatives; bondholders; open interest; physical bonds; derivatives transaction; hedge funds; hedging; subordinated debt; derivatives market; financial futures; futures trading; exchange traded derivatives; derivative market; cash bonds; insider trading; financial institutions; equity derivatives; international financial futures; derivative products; trust company; financial resources; financial sector; derivative assets; interest rate derivatives; financial services; otc transactions; financial market; senior bondholders; equity capital; government bonds; accrued interest; financial assets; futures markets; credit risks; derivative contract; credit markets; corporate bonds; financial regulation;

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References

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  1. Jean Helwege & Samuel Maurer & Asani Sarkar & Yuan Wang, 2009. "Credit default swap auctions," Staff Reports, Federal Reserve Bank of New York 372, Federal Reserve Bank of New York.
  2. Darrell Duffie, 2009. "Policy Issues Facing the Market for Credit Derivatives," Book Chapters, Hoover Institution, Stanford University, in: John D. Ciorciari & John Taylor (ed.), The Road Ahead for the Fed, chapter 8 Hoover Institution, Stanford University.
  3. Bliss, Robert R. & Kaufman, George G., 2006. "Derivatives and systemic risk: Netting, collateral, and closeout," Journal of Financial Stability, Elsevier, Elsevier, vol. 2(1), pages 55-70, April.
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Citations

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Cited by:
  1. Joshua Aizenman & Michael M. Hutchison & Yothin Jinjarak, 2011. "What is the Risk of European Sovereign Debt Defaults? Fiscal Space, CDS Spreads and Market Pricing of Risk," NBER Working Papers 17407, National Bureau of Economic Research, Inc.
  2. Jim Armstrong, 2003. "The Syndicated Loan Market: Developments in the North American Context," Working Papers, Bank of Canada 03-15, Bank of Canada.
  3. Sorin Gabriel Anton, 2011. "The Local Determinants Of Emerging Market Sovereign Cds Spreads In The Context Of The Debt Crisis. An Explanatory Study "," Analele Stiintifice ale Universitatii "Alexandru Ioan Cuza" din Iasi - Stiinte Economice, Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, vol. 58, pages 41-52, november.
  4. William Lang & Julapa Jagtiani, 2010. "The Mortgage and Financial Crises: The Role of Credit Risk Management and Corporate Governance," Atlantic Economic Journal, International Atlantic Economic Society, International Atlantic Economic Society, vol. 38(3), pages 295-316, September.
  5. Reszat, Beate, 2003. "How has the European Monetary Integration Process Contributed to Regional Financial Market Integration?," HWWA Discussion Papers 221, Hamburg Institute of International Economics (HWWA).
  6. Neuner, Stefan & Schäfer, Klaus, 2011. "Zentrale Gegenparteien für den außerbörslichen Derivatehandel in der Praxis," Bayreuth Working Papers on Finance, Accounting and Taxation (FAcT-Papers) 2011-02, University of Bayreuth, Chair of Finance and Banking.
  7. Stan Cerulus, 2012. "Central clearing for credit default swaps: A legal analysis of the new central clearing regulations in Europe and the US," Journal of Financial Regulation and Compliance, Emerald Group Publishing, Emerald Group Publishing, vol. 20(2), pages 212-244, May.
  8. Markose, Sheri & Giansante, Simone & Shaghaghi, Ali Rais, 2012. "‘Too interconnected to fail’ financial network of US CDS market: Topological fragility and systemic risk," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 83(3), pages 627-646.
  9. Lang, William W. & Jagtiani, Julapa, 2010. "The Mortgage Financial Crises: The Role of Credit Risk Management and Corporate Governance," Working Papers, University of Pennsylvania, Wharton School, Weiss Center 10-12, University of Pennsylvania, Wharton School, Weiss Center.
  10. Stefan ARPING,, 2002. "Playing Hardball: Relationship Banking in the Age of Credit Derivatives," FAME Research Paper Series, International Center for Financial Asset Management and Engineering rp49, International Center for Financial Asset Management and Engineering.
  11. María Rodríguez-Moreno & Sergio Mayordomo & Juan Ignacio Peña, 2012. "Derivatives Holdings and Systemic Risk in the U.S. Banking Sector," Faculty Working Papers, School of Economics and Business Administration, University of Navarra 21/12, School of Economics and Business Administration, University of Navarra.

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