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| Author: | Squam Lake Working Group on Financial Regulation |
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| Publisher: | Council on Foreign Relations Press |
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Release Date: July 2009
8 pages
Credit default swaps (CDS) are contracts that provide protection against the risk of default by borrowers. The buyer of the CDS makes periodic payments to the seller, and in return the buyer will receive a payoff if the borrower defaults, analogous to an insurance contract. While credit default swaps can be a valuable tool for managing risk, they can also contribute to systemic risk. CDS contracts are currently traded over the counter rather than on exchange, raising concerns over counterparty risk. The failure of one important participant in the CDS market can destabilize the financial system by inflicting significant losses on many trading partners simultaneously. A clearinghouse could in theory reduce counterparty risk by standing between the buyer and seller of protection, insulating the counterparties’ exposure to each other’s default. This Working Paper, the fifth in the Squam Lake Working Group series distributed by the Center for Geoeconomic Studies, analyzes the market for credit default swaps and makes specific recommendations about appropriate roles for clearinghouses and about how they should be organized.
The Squam Lake Working Group on Financial Regulation is a nonpartisan, nonaffiliated group of fifteen academics who have come together to offer guidance on the reform of financial regulation.
The group first convened in fall 2008, amid the deepening capital markets crisis. Although informed by this crisis—its events and the ongoing policy responses—the group is intentionally focused on longer-term issues. It aspires to help guide reform of capital markets—their structure, function, and regulation. This guidance is based on the group’s collective academic, private sector, and public policy experience.
To achieve its goal, the Squam Lake Working Group is developing a set of principles and their implications that are aimed at different parts of the financial system: at individual firms, at financial firms collectively, and at the linkages that connect financial firms to the broader economy.
The members of the group are
Martin N. Baily
Brookings Institution
Andrew B. Bernard
Dartmouth College
John Y. Campbell
Harvard University
John H. Cochrane
University of Chicago
Douglas W. Diamond
University of Chicago
Darrell Duffie
Stanford University
Kenneth R. French
Dartmouth College
Anil K Kashyap
University of Chicago
Frederic S. Mishkin
Columbia University
Raghuram G. Rajan
University of Chicago
David S. Scharfstein
Harvard University
Robert J. Shiller
Yale University
Hyun Song Shin
Princeton University
Matthew J. Slaughter
Dartmouth College
René M. Stulz
Ohio State University
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