Thursday, July 16, 2009

Credit Default Swaps - Game Over?

The recent DOJ inquiry into CDS pricing is just what the CDS business didn't need.

More oversight and regulatory headaches.

Hear me out, the Credit Derivatives business needs to be closely monitored, but not at this moment, especially when the credit markets are very delicate. There is still some trillions in outstanding notional amount of swap contracts out there floating around that need to be either offset or settled.

Why in the world when we are in the middle of a recession, we feel the need to interfere in this volatile market when liquidity has already dried up to the extent where rational pricing is out of whack?

More regulations at this moment only worsens the problem. We should be first settling all CDS counter party exposure from weak banks and institutions like AIG, then worrying about pricing inquiries later.

The CDS market has contracted severely this year over troubles at Lehman, AIG, and others, we all saw what type of pressure that put on the markets. I fear another run on a weak institution if market participants are forced out of business because of more regulation.

Remember....Liquidity drives rational pricing.

1 comment:

  1. I agree with you on this. The CDS business is still fragile, with the DOJ sticking its nose, the liquidity is going to dry up, widening spreads.