The report was mandated by the Group of 20 leading industrialised and emerging nations at the Cannes Summit in November 2011, where IOSCO was called on “to assess the functioning of credit default swap (CDS) markets and the role of those markets in price formation of underlying assets” by the next G20 Summit.
The market for CDS is undergoing rapid change. Over the last several years, CDS contracts have become more standardised, and electronic processing and central clearing of trades have increased. Large amounts of CDS data have become publicly available and abundant research has been conducted to assess the role that CDSs play in global financial markets.
IOSCO’s report addresses the issues mentioned in the Cannes declaration and discusses the recent changes and current trends in the CDS markets. It also provides information from recent literature about the trading, pricing and clearing of CDS, while covering the following areas:
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basic functioning of CDS contracts and market size
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features of the CDS market
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contract standards
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market structure
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counterparty risk and collateralisation
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CDS prices and bond spreads
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CDS role under Basel III
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the impact of CDS on the bond market
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CDS impact on credit spreads and creditor incentives
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CDS impact on the secondary market of underlying bonds
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CDS role in the price discovery process.
Among the report’s conclusions is that existing empirical evidence on many aspects of the CDS market tends to be mixed, such as on the impact of CDS on the orderly functioning of the primary and secondary markets of the underlying bonds and on creditor incentives, although the CDS market is found to have an important role in the price discovery process.
Press release
Full report
© IOSCO
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