Among the many reforms in the aftermath of the financial crisis is the agreement among international regulators that all over-the-counter (OTC) derivatives contracts should be reported to trade repositories. The goal is to help market participants and regulators gain a better understanding of the extent and distribution of risk taking in financial markets. G-20 leaders committed to this and other improvements to financial market infrastructure (we described the move to central clearing parties (CCPs) in earlier posts). But, unlike the shift to CCPs, trade repositories seem very unlikely to meet officials’ lofty aspirations in the next few years...Read More
CDS
Central Clearing Parties: What they are and why we need them - Part 3
The CCP Advantage: Incentive and Means to Control Counterparty Risks
The case of the insurance giant, AIG, highlights the information and incentives problems that CCPs can address. In the run-up to the financial crisis, AIG’s London-based Financial Products Group managed to sell enormous amounts of credit risk insurance without the liquid resources necessary to cover potential cash calls. By end-June 2008, AIG had taken on $446 billion in notional credit risk exposure as a seller of credit risk protection via credit default swaps (CDS).
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