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Credit Derivatives: Systemic Risks and Policy Options?

Author

Listed:
  • Mr. John Kiff
  • Ms. Jennifer A. Elliott
  • Mr. Elias G. Kazarian
  • Ms. Jodi G Scarlata
  • Carolyne Spackman

Abstract

Credit derivative markets are largely unregulated, but calls are increasingly being made for changes to this "hands off" stance, amidst concerns that they helped to fuel the current financial crisis, or that they could be a cause of the next one. The purpose of this paper is to address two basic questions: (i) do credit derivative markets increase systemic risk; and (ii) should they be regulated more closely, and if so, how and to what extent? The paper begins with a basic description of credit derivative markets and recent events, followed by an assessment of their recent association with systemic risk. It then reviews and evaluates some of the authorities' proposed initiatives, and discusses some alternative directions that could be taken.

Suggested Citation

  • Mr. John Kiff & Ms. Jennifer A. Elliott & Mr. Elias G. Kazarian & Ms. Jodi G Scarlata & Carolyne Spackman, 2009. "Credit Derivatives: Systemic Risks and Policy Options?," IMF Working Papers 2009/254, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2009/254
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    References listed on IDEAS

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    Cited by:

    1. Augustin, Patrick & Subrahmanyam, Marti G. & Tang, Dragon Yongjun & Wang, Sarah Qian, 2014. "Credit Default Swaps: A Survey," Foundations and Trends(R) in Finance, now publishers, vol. 9(1-2), pages 1-196, December.
    2. Mayordomo, Sergio & Rodriguez-Moreno, Maria & Peña, Juan Ignacio, 2014. "Derivatives holdings and systemic risk in the U.S. banking sector," Journal of Banking & Finance, Elsevier, vol. 45(C), pages 84-104.
    3. Markose, Sheri & Giansante, Simone & Shaghaghi, Ali Rais, 2012. "‘Too interconnected to fail’ financial network of US CDS market: Topological fragility and systemic risk," Journal of Economic Behavior & Organization, Elsevier, vol. 83(3), pages 627-646.
    4. Váradi, Kata & Ladoniczki, Sára Kata, 2018. "Elszámolóházak alapbiztosítéki követelményeinek számítási módszertana [Numerical methodology in the basic insurance requirements of clearing houses]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(7), pages 780-809.
    5. Neuner, Stefan & Schäfer, Klaus, 2011. "Zentrale Gegenparteien für den außerbörslichen Derivatehandel in der Praxis," Bayreuth Working Papers on Finance, Accounting and Taxation (FAcT-Papers) 2011-02, University of Bayreuth, Chair of Finance and Banking.
    6. Berlinger, Edina & Dömötör, Barbara & Illés, Ferenc, 2019. "Anti-cyclical versus risk-sensitive margin strategies in central clearing," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 62(C), pages 117-131.
    7. Aizenman, Joshua & Hutchison, Michael & Jinjarak, Yothin, 2013. "What is the risk of European sovereign debt defaults? Fiscal space, CDS spreads and market pricing of risk," Journal of International Money and Finance, Elsevier, vol. 34(C), pages 37-59.
    8. Ivana Ruffini & Robert Steigerwald, 2014. "OTC Derivatives—A Primer on Market Infrastructure and Regulatory Policy," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q III, pages 80-99.
    9. Asia Aman, 2019. "Are CDS Spreads Sensitive to the Term Structure of the Yield Curve? A Sector-Wise Analysis under Various Market Conditions," JRFM, MDPI, vol. 12(4), pages 1-13, September.
    10. Stefan ARPING,, 2002. "Playing Hardball: Relationship Banking in the Age of Credit Derivatives," FAME Research Paper Series rp49, International Center for Financial Asset Management and Engineering.
    11. Sorin Gabriel Anton, 2011. "The Local Determinants Of Emerging Market Sovereign Cds Spreads In The Context Of The Debt Crisis. An Explanatory Study "," Analele Stiintifice ale Universitatii "Alexandru Ioan Cuza" din Iasi - Stiinte Economice (1954-2015), Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, vol. 58, pages 41-52, november.
    12. Yulia Titova & Henry Penikas & Nikita Gomayun, 2020. "The impact of hedging and trading derivatives on value, performance and risk of European banks," Empirical Economics, Springer, vol. 58(2), pages 535-565, February.
    13. Ms. Eva Jenkner & Zhongjin Lu, 2014. "Sub-National Credit Risk and Sovereign Bailouts: Who Pays the Premium?," IMF Working Papers 2014/020, International Monetary Fund.
    14. Long H. Vo, 2015. "Lessons From The 2008 Global Financial Crisis: Imprudent Risk Management And Miss Calculated Regulation," Journal of Management Sciences, Geist Science, Iqra University, Faculty of Business Administration, vol. 2(1), pages 205-222, March.
    15. Edina Berlinger & Barbara Dömötör & Ferenc Illés & Kata Váradi, 2016. "Stress Indicator for Clearing Houses," Central European Business Review, Prague University of Economics and Business, vol. 2016(4), pages 47-60.
    16. Berlinger, Edina & Váradi, Kata & Dömötör, Barbara & Illés, Ferenc, 2016. "A tőzsdei elszámolóházak vesztesége [The loss from central clearing houses]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(9), pages 993-1010.
    17. Lang, William W. & Jagtiani, Julapa, 2010. "The Mortgage Financial Crises: The Role of Credit Risk Management and Corporate Governance," Working Papers 10-12, University of Pennsylvania, Wharton School, Weiss Center.
    18. Gabriel A. Giménez-Roche, 2011. "Institutional Illusion and Financial Entrepreneurship in the European Debt Scheme," Chapters, in: David Howden (ed.), Institutions in Crisis, chapter 1, Edward Elgar Publishing.
    19. Helene Schuberth & Stephan Schulmeister, 2011. "Settlement Systems and Financial Transactions Taxes," WIFO Studies, WIFO, number 42610, March.
    20. Óscar Arce & Fco. Javier González Pueyo & Lucio Sanjuán, 2010. "The Credit Default Swaps market: areas of vulnerability and regulatory responses," CNMV Working Papers CNMV Working Papers no. 4, CNMV- Spanish Securities Markets Commission - Research and Statistics Department.
    21. William Lang & Julapa Jagtiani, 2010. "The Mortgage and Financial Crises: The Role of Credit Risk Management and Corporate Governance," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 38(3), pages 295-316, September.
    22. Corneil, Bruce L. & McNamara, Sue, 2010. "Lessons and consequences of the evolving 2007-? Credit Crunch," MPRA Paper 35912, University Library of Munich, Germany.

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