Credit Default Swap: Regulations, Changes and Systemic Risk

Abstract

The CDS market grew significantly in 2007 and it have claimed that it has been allowed to become too large without proper regulation and that, because all contracts are privately negotiated, the market has no transparency. But in 2009 Substantial changes was made in this market with the implementation of CDS big bang & small bang protocols and introduction of new CDS trading conventions. This helped in to achieve same day trade matching, the elimination of offsetting trades, and centralized clearing. This paper covers the key features of CDS, its documentation and regulation, recent changes in CDS market and its factors that lead to systemic crisis.

Key terms: reference entity, credit event, default payment, restructuring, systemic risk, central counter-parties (CCP)