CEPII, Recherche et Expertise sur l'economie mondiale
The Credit Default Swap Market and the Settlement of Large Defaults

Virginie Coudert
Mathieu Gex

 Highlights :

 Abstract :
The huge positions on the credit default swaps (CDS) have raised concerns about the ability of the market to settle major entities’ defaults. The near-failure of AIG and the bankruptcy of Lehman Brothers in 2008 have revealed the exposure of CDS’s buyers to counterparty risk and hence highlighted the necessity of organizing the market, which triggered a large reform process. First we analyse the vulnerabilities of the market at the bursting of this crisis. Second, to understand its resilience to major credit events, we unravel the auction process implemented to settle defaults, the strategies of buyers and sellers and the links with the bond market. We then study the way it worked for key defaults, such as Lehman Brothers, Washington Mutual, CIT and Thomson, as well as, for the Government Sponsored Enterprises. Third, we discuss the ongoing reforms aimed at strengthening the market resilience.

 Keywords : Credit derivatives | bankruptcy | credit default swap | auction

 JEL : D44, G01, G15, G33
CEPII Working Paper
N°2010-17, August 2010

Non Technical Summary

Full text

BibTeX (with abstract),
plain text (with abstract),
RIS (with abstract)

 Fields of expertise

Money & Finance