BizJournals Portfolio
Nov 03 2008 11:02pm EDT

Exchange-Traded Derivatives: Why Stop at CDS?

Donna Block has an overview of all the different groups jockeying to set up a CDS exchange:

Businesses trying to establish the new market include CME Group Inc.; NYSE Euronext Inc.; IntercontinentalExchange Inc. or ICE; Eurex, the derivatives arm of Deutsche Börse AG; and Knight Capital Group Inc.

But are all these people essentially fighting the last war? Why should CDS, of all non-exchange-traded derivatives, be the ones which are the most dangerous in the future? Neil Roland reports:

"Who's to say the next big crisis won't involve commodity or currency swaps?" said Texas University law professor Henry Hu, who testifies regularly before Congress about derivatives. "If we really care about transparency, we ought to care about all over-the-counter derivatives." ...
University of Houston finance professor Craig Pirrong said a single clearinghouse for the entire $600 trillion derivatives market would do more to address risk and inefficiencies than a guarantor for just one of its sectors.

I do wonder at the way in which credit default swaps, more than any other financial instrument, have become demonized to the point at which people genuinely think that a more-regulated CDS market will pose substantially less systemic risk. But of course the amount of non-CDS OTC derivatives, with all their counterparty risk, dwarfs the CDS market. Which makes me think that all of this is really gesture politics more than it is a serious attempt to reform the financial architecture.


Comments

If you are commenting using a Facebook account, your profile information may be displayed with your comment depending on your privacy settings. By leaving the 'Post to Facebook' box selected, your comment will be published to your Facebook profile in addition to the space below.


Connect With Portfolio.com

Come on, like us—you know you want to.

Follow us and if you're an innovative entrepreneur, we'll return the favor.

Today's top stories, conversation starters, and the back nine business bites.

spotlight on

Slideshows

500 Startups Hits New York

Dave McClure's brainchild makes its way to New York and introduces East Coast money folks to some intriguing new companies. View Slideshow