Banks brace for derivatives ‘big bang’
Credit default swap dealers are cleaning up a dark corner of the derivatives market, but the risk of a blowup remains.
One corner of the wild and wooly world of derivatives is about to get a little tamer — and not a moment too soon for those who fret over the rising cost of bailouts.
The banks that handle the bulk of the trading in credit default swaps — the unregulated contracts whose misuse helped AIG (AIG, Fortune 500) bring about its own demise — are adopting new trading and settlement rules this week in a shift the industry has labeled the “big bang.”
The changes will set new terms for credit default swaps traded on companies in North America, standardize payment schedules, or coupons, and eliminate clauses that would force CDS users to settle trades when a company does a limited restructuring under certain circumstances. Other shifts will streamline the process for settling the swaps in the event of default.
The moves should eventually make it easier for regulators to oversee the CDS market, whose rapid growth and limited transparency have long been a source of acute anxiety.
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