I basically know nothing about credit default swaps except for what was presented in this radio program:
My question is, if the credit default swap market currently is exposed to huge counter-party risk, and if you somehow got these contracts to trade on a regulated exchange, how does this shift the counter-party risk at all? I mean, from what I am hearing, the risk to these companies who sold the credit default swap insurance could take down any institution or exchange (the amount of money involved is almost incomprehensible). How would an exchange eliminate this counter-party risk? Wouldn't the exchange have to have unlimited pockets in order to guarantee these contracts as good? Confused.
Daily settlements and margin requirements like futures. I just hope they do not mix the clearing of futures with the CDS's and form so type of separate entity.