Misconceptions about the utility and purpose of credit default swaps continue to spread and efforts to defend them have been rebuffed by misguided regulatory efforts, according to reseaPARA_BREAK_SENTINEL_9f8e7d6c Misconceptions about the utility and purpose of credit default swaps continue to spread and efforts to defend them have been rebuffed by misguided regulatory efforts, according to research by Tabb Group. Although the outstanding notional value of the CDS market has declined dramatically largely due to trade compression, annual revenues from central clearing, electronic trading and existing trade migration are set to grow at a compound annual growth rate of 12 per cent and reach USD174m by 2011, says senior analyst Kevin McPartland, author of the report (pictured). The firm says the report addresses CDS misconceptions versus reality due to a lack of understanding and unfair treatment during the financial crisis, discusses how and where the market segment will continue to expand, examines the current state of major central clearing initiatives, and pinpoints issues to watch in the years ahead as the CDS market matures. A new regulatory structure including central clearing and increased electronic trading will streamline the market, lower barriers to entry for buy-side firms and ultimately increase volumes, McPartland says. 'However, beyond the ubiquitous counterparty risk issue, concerns over operational efficiency issues continue to plague the CDS market at the same time that global regulators are pushing the industry to adopt central clearing for trades and increase market transparency,' he adds. Four proposed major initiatives from CME/Citadel, NYSE Euronext, Eurex and ICE (which includes Creditex and TCC), each vying to be the central counterparty of choice for the CDS market, will allow trades into their clearing houses from nearly any execution platform, including those operated by their competition. However, McPartland cautions that even when the first central clearing entity comes online, a number of challenges will remain that require further thought and innovation. Despite strong backing by regulators, some industry members believe the problems with a central clearing solution for the CDS markets go deeper. 'At least one alternative approach, NetDelta, a wholly-owned subsidiary of Knight Trading, currently exists, and others are likely in the works,' McPartland says. Casting an eye to the future, he argues that CDS market transparency, mandates and electronic trading are also issues worth tracking.
Exploiting the volatility premium through systematic strategies
With over $2bn in AUM just two years after launch, Empureon is leveraging volatility premiums, portfolio hedging and portable alpha to…
More
Alternative Views Ahmet Peker and Daniel Lucke
In Alternative Views Hedgeweek®,goes behind closed doors with those in the know to get the latest on hedge funds. Today, we speak to Ahmet…
More
Removing human bias from an concentrated market
Mast Investments outline how systematic investment processes seek to reduce behavioural biases while identifying opportunities created by…
More
