Transparency: 90% of all OTC credit trades in the world are stored in the DTCC Trade Information Warehouse. The other 10% are structured products such as CDOs, CLOs, CLNs etc.

If the politicians or regulators really want to know who has what contracts they have two sources A) DTCC or B) the banks and hedge funds themselves, who have accurate records of what contracts they hold.

B) Hedging.

If I buy protection on BigCo, and in particular on a specific bond issued by BigCo, the seller is obliged to deliver cash when BigCo defaults on a bond, or goes bankrupt. The way for the seller to hedge is to buy the bonds being protected, it works like this:

A) Buyer purchases bonds from BigCo
B) Buyer buys protection from Seller naming a BigCo and the bond he holds
C) Time passes
D) BigCo fails to pay on the Bond, triggering the protection pay out from Seller
E) The recovery rate for the bonds in the market is determined (by auction currently)
F) Seller pays Buyer the loss on the bonds
G) Buyer is *obliged* to deliver the Bonds to Seller
H) Seller hopes BigCo remains in business, and waits for the Bonds to increase in value

- Not all buyers hold the bonds and are prepared to pay away a premium as a speculator. The Sellers keep the premiums (coupons) as profits. If no one defaults, the markets balance out.

3) Netting
If Seller above, in turn buys protection from a speculator or other dealer, we can regard his position as net of the two trades.

Most of the data in public doesn’t show net positions only the gross (i.e. adding the notional on both trades) and is misleading.

DTCC publish data on CDS contracts on their website, have a look.

4) Impaired assets
It isn’t the CDS contracts that have caused this big mess. It’s like blaming the power station for burning your house.

It lending hadn’t got out of hand, the underlying assets backed by mortgages wouldn’t have crashed.

I would like to see a detailed examination of the actions of politicians and regulators in how they controlled the amount of lending to Joe Public, such as the salary multiple for a mortgage, and the misleading discount periods on mortgages, and Alt-A where income is irrelevant.

You could point your finger in two ways:

A) The rules on retail lending being too loose
B) The fact that the banks used the rules without imposing any common sense constraints.

Is there a case to be made against retail lenders for mis-selling mortgages folks couldn’t afford?

Bill.

Credit default swaps should be regulated as insurance, with a requirement of insurable interest as well as supervision of capital adequacy.

I suspect that “naked” cds are unenforceable as a matter of public policy…

I would add to your thought that no regulatory action needs to be taken to blow this thing up. All that has to happen is for the issuer of a CDS to refuse to pay, claiming that the CDS is an unenforceable “wagering contract” under applicable law. I don’t know what jurisdiction would hear this claim – there may even be arbitration provisions – but public policy arguments trump all others, and it would seem to me that somewhere there is a judge who is willing to disallow a claim on a CDS, especially when evidence is presented that the claimant actually participated in a short atttack intended to take down the “insured” business.

Beyond having their CDS’s voided, the holders of these things may also be held liable for the destruction of the insured business. I’m not sure what the theory would be, but lawyers like to say that there is no wrong without a remedy, and although there are cases where that maxim is wrong, there are many more where judges make it right.

Staying tuned is definitely in order. Good Work!

The Chicago futures exchanges thrive becuase of but literally thousands of speculators with no ‘insurable interest’ are willing to one side or the ohter in an interest rate transaction.

The real problem with CDS (as structured now) is that that they are options for which there is no underlying hedge. The only hedge for CDS is to find someone to take some or all of the other side. And in many cases, these people are, God forbid, speculators with no insurable interest.

The swaps problem is elephant in the room and poses the most danger to our financial system as a whole the way I see it. I am glad you are bringing this up. I think you need to keep searching for a solution to the problem via this forum until it gains traction in the business media.

I would like to punish hedge-funders who wrote default insurance in violation of state and federal insurance laws or fraud statutes. Or take away their trading licenses. This will be hard to do since no one will come forward and expose themselves. Also many are offshore. It could be better to tax gains from “premiums” or from realized profits on “credit events” at 100% where there was no insurable interest just speculation.

One problem that will arise with insurable interest is that are certainly hedges that are legitimate but indirect. I could hedge my Dow index longs by owning CDS on individual Dow components.

For the SEC to declare all swaps transactions null and void where the holder has no direct financial interest in the underlying,and all swaps held by any holder which are in excess of the holder’s interest in the underlying. Premiums paid to the seller to be returned to the holder.
Now, how big is the problem?

I see no difference between swaps and betting on the ponies with a guy named Sal in the parking lot at Churchill downs. What is the first thing the cops do when they bust Sal?