Column by TABB Group senior analyst Kevin McPartland
Credit Default Swaps (CDS) scare people. An area once known only by financial industry professionals has been brought closer to the mainstream as reports on the turmoil in the derivatives markets have moved from section C of the Wall Street Journal to section A of your local paper. These stories do not speak of credit protection and hedging risk, but only of the doom and gloom associated with investing with these instruments. It’s not just you and I that are scared either; the President, the Fed and the Treasury Department among others have voiced their concerns over the state of the CDS market.
As trade volumes soar, so too does the number of unconfirmed trades. Software and processes within the banks can not be created in time to handle the new business generated by the front office, leaving trades to be confirmed manually. Additionally, the fact that novations – the replacement of a counterparty to an existing trade with another – are most often communicated via email and processed manually continues to hinder the ability of market participants to properly monitor the risk associated with CDS positions.
*To read full column please refer to the TABB Group’s web site at http://www.tabbgroup.com/
This column is based on research conducted by the newly launched TABB Derivatives Service, a research service delivering access to the most current, in-depth, non-biased and highly actionable insight covering the critical business issues and trends confronting firms and professionals trading derivatives.
