Swaps Regulation - White Paper - European Central Bank - Credit Default Swaps and Counterparty Risk - August 2009

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August 2009

This report sets out four main features of the credit default swap (CDS) market in the EU that deserve attention for financial stability purposes:

  • The CDS market remains highly concentrated in the hands of a small group of dealers, which is European banks’ main concern as regards CDS counterparty risk
  • The interconnected nature of the CDS market results in increased contagion risk
  • CDSs are widely – and increasingly – used as price indicators for other markets, including loan, credit and even equity markets, meaning that these instruments are playing a broader role in the determination of prices
  • The report also highlights the risk factors related to the significant widening observed in sovereign CDS spreads in mid-March 2009

This report also provides an overview of a number of regulatory and market initiatives that are under way with a view to addressing these weaknesses, including details of the latest EU consultation for OTC derivatives, including CDSs, and reviews the various initiatives to establish central counterparty clearing houses (CCPs) for CDSs.

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