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SEC yet to Mandate Clearing of Single-Name Credit Default Swaps

The Securities and Exchange Commission (SEC) has not yet mandated single-name credit swaps to comply with the trading and clearing requirements, which would reduce their liquidity. Market participants believe that central clearing would aid in revival of the product by reducing capital and funding requirements for dealers and large buy-side firms recently pledged to start clearing voluntarily.

Credit Default Swipe (CDS) is a derivative contract that allows an investor to place a bet on whether a company or country will default on its debt within a fixed time period. Basically, it serves as protection against the credit risk stemming from holding the debt instrument. Prior to the financial crisis, the credit swaps business grew rapidly as it generated huge profits to several major global banks. However, experts believe that uncontrolled growth of this risky business is one of the reasons behind the 2008 financial crisis. So, companies such as Citigroup and Wells Fargo are pushing SEC to finish writing rules that mandate central clearing of credit-default swaps. The new mandate is expected to significantly boost the US$13 trillion market in the U.S.

News Characteristics

Date : Mar 17, 2016
Region : North America
Industry : Capital Markets
Function : Regulation and Compliance
Sub-Function : Regulatory changes