The International Organization of Securities Commissions has published today a report on The Credit Default Swap Market, which seeks to inform the ongoing regulatory debate on CDS and highlight some of the key policy issues involving these financial swap agreements.
The report was mandated by the Group of 20 leading industrialized and emerging nations at the Cannes Summit in November 2011, where IOSCO was called on "to assess the functioning of credit default swap (CDS) markets and the role of those markets in price formation of underlying assets" by the next G20 Summit that begins on Monday in Los Cabos, Mexico.
The market for CDS is undergoing rapid change. Over the last several years, CDS contracts have become more standardized, and electronic processing and central clearing of trades have increased. Large amounts of CDS data have become publicly available and abundant research has been conducted to assess the role that CDSs play in global financial markets.
IOSCO's report addresses the issues mentioned in the Cannes declaration and discusses the recent changes and current trends in the CDS markets. It also provides information from recent literature about the trading, pricing and clearing of CDS, while covering the following areas:
Basic functioning of CDS contracts and market size
Features of the CDS market
Counterparty risk and collateralization
CDS prices and bond spreads
CDS role under Basel III
The impact of CDS on the bond market
CDS impact on credit spreads and creditor incentives
CDS impact on the secondary market of underlying bonds
CDS role in the price discovery process
Among the report's conclusions is that existing empirical evidence on many aspects of the CDS market tends to be mixed such as on the impact of CDS on the orderly functioning of the primary and secondary markets of the underlying bonds and on creditor incentives, although the CDS market is found to have an important role in the price discovery process.
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