|
| |
N° 2010-17 |
  |
| August 2010 |
| The Credit Default Swap Market and the Settlement of Large Defaults |
Virginie Coudert
Mathieu Gex |
|
| The huge positions on the credit default swaps (CDS) have raised concerns about the ability of the
market to settle major entities’ defaults. The near-failure of AIG and the bankruptcy of Lehman
Brothers in 2008 have revealed the exposure of CDS’s buyers to counterparty risk and hence
highlighted the necessity of organizing the market, which triggered a large reform process. First we
analyse the vulnerabilities of the market at the bursting of this crisis. Second, to understand its
resilience to major credit events, we unravel the auction process implemented to settle defaults, the
strategies of buyers and sellers and the links with the bond market. We then study the way it worked
for key defaults, such as Lehman Brothers, Washington Mutual, CIT and Thomson, as well as, for the
Government Sponsored Enterprises. Third, we discuss the ongoing reforms aimed at strengthening the
market resilience. |
Non-technical summary  |
|
Résumé
non-technique
en français |
|
| Full text |
| |
|
| Credit derivatives; bankruptcy; credit default swap; auction |
Keywords |
| D44; G01; G15; G33 |
JEL classification |
| |
|
| To visualise the full text document, use Acrobat
Reader |
|
| Contact: |
|
| |
|
| |
|
|
|
|
|
