Should Credit Default Swap Issuers be Subject to Prudential Regulation?

Saunders, Benjamin

doi:10.5235/147359710793129390

Cited by 1 publication

(2 citation statements)

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“…Sharma (2013) pays emphasis to prudent supervision as the prime means of regulating CDSs. Angelini (2012) and Saunders (2010) identify the need for a derivative register and mitigating counterpart risks, and Cerulus (2012); Schmaltz and Thivaios (2014); and Cont and Kokholm (2014) emphasize the need for a clearing house and central clearing requirements for CDSs. 5 Cont and Minca (2016) prove that the central clearing of CDSs, through a well-capitalized central counterparty clearing house, can reduce the probability and the magnitude of a systemic illiquidity spiral by reducing the length of the chains of critical receivables within the financial network.…”

Section: Literature Reviewmentioning

confidence: 99%

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Being Naked - et Quo hinc?: Developing a ‘Skin-in-the-Game’ Solution for Credit Default Swaps

Senarath

Rajapakse

Robbé

et al. 2022

IJFS

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A credit default swap (CDS) is a derivative financial instrument that provides insurance against credit risk. CDSs on subprime Asset Backed Securities (ABSs) paved the way for securitizers to hedge the credit risk of the underlying subprime loans during the onset of the Global Financial Crisis (GFC). Thus, mortgage originators were least concerned about the quality of loans they securitize since they could hedge the default risk via CDS, paving way to a moral hazard concern. We argue that the core issue pertaining to CDSs, moral hazards, remains unattended even after a decade since the GFC. This paper, utilizing a lexonomic approach embedded in the second-best efficiency criteria, examines the mechanism behind a CDS and develops a regulatory framework with the view of minimizing moral hazards associated with CDSs. Our analysis indicates that incorporating an ‘excess’ on CDSs may minimize moral hazards, since originators are compelled to bear part of the risk associated with assets they create.

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Section: Literature Reviewmentioning

confidence: 99%

“…In a broader sense, a CDS is a derivative financial instrument (Saunders 2010). In simple terms, a CDS is an agreement between two parties whereby one party agrees to pay a certain amount in the case of a specific credit event (Stulz 2010).…”

Section: Introductionmentioning

confidence: 99%