Time to standardize the CDS market just like options

Discussion in 'Economics' started by KINGOFSHORTS, Mar 14, 2009.

  1. I think the time to get the CDS market standardized jus t like the equity options market is now. Have a transparent trading system and clearinghouse like the options market where anyone can buy or sell these swaps and they have to secure them against collateral just like when selling cash secured puts or covered calls etc..

    If this has been done with the CDS market before anyone traded a single swap you would not have this screwed up situation we are in now.
  2. except they would have unloaded onto unsuspecting investors and dropped the bids to 0.00
  3. That will work will it not? If the CDS market becomes more visible huge amounts of scared money will come off the sidelines and economies will pick up the pace again.
  4. pneuma


    Why don't you just call them what they are - insurance - and let them be under the same scrutiny as that for your car of home?

    Further, there are more $ in CDS than in the associated loans, and that means more than 1 CDS per mortgage. The first one should be recognized and the remainder cancelled with the premiums refunded.

  5. I would have both practices abolished.
  6. bellman


    This should be the focus and allocation of tax dollars. We should build the most efficient, transparent markets in the world. That is the future.

    What kind of volume would the CDS market derive? Would insiders be allowed to trade? I say yes.

  7. The idea sounds good from a distance. I'm not sure how feasible it would be to attempt to create a "standard" credit default swap. I think the real "hail Mary" pass of TARP was the hope that some mechanism would surface to restore trading in OTC CDO assets such that the CDS (portfolio insurances) markets could slowly unwind. I don't know what the notional value of AIG's liabilities are, but I suspect no one in Washington will be willing to funnel much more money down that particular rat hole.

    We can all look back and imagine how much better off we would be right now if the CDO market had been based on a clearing house model (same for CDS). With that same imagination, it is hard to picture how moving these instruments into such a model now will fix anything. I don't think there is any where near enough financial transparency to allow a clearing house model to function with these assets.

    There is no magical financial engineering or market mechanism to fix this situation. Market mechanisms require willing sellers and buyers. These assets will only come to market if their owners become bankrupt. And even at that; Turning a CDO back into a collection of individually collateralized assets is the financial equivalent of separating a mixture of different color paints.