A STUDY OF REGULATIONS ON CREDIT DEFAULT SWAPS

Abstract

Credit derivatives are one of the major financial innovations of the last decade. The market for credit derivatives has become the third-largest derivatives market —after interest rate and foreign exchange derivatives— in terms of gross market value. Among credit derivatives, the credit default swap (CDS) is the most popular instrument for trading credit risk. CDS are being perceived as a double-edged sword and are the subject of a lively discussion in the academic community as well as in the media. With economies growing there has been an excessive demand for capital from all sorts of businesses to further fuel their growth. Banks seek to address this need for capital and in turn assume risk. But for any country to continue to grow it’s an imperative that we have healthy financial institutions which are able to manage their risks well. Credit derivatives which emerged globally nearly a decade ago and created a rage as effective tools for credit risk management are set to help banks better manage their credit risks. The introduction shall provide an overview of the significant features of the credit default swaps, Why CDS are seen as double edge sword and should be used with utmost care and is used by fully knowing the implications of it. The main purpose of this research is, therefore, to understand Credit Default Swaps, investigate its implications on an economy as well as the impact of a new regulatory framework like Big Bang Protocol, Small Bang Protocol, Dodd-Frank act etc. on the market and its participants and also how these regulations can prevent its misuse and keep it under check and ensures that the financial crisis that we faced in 2008 is not repeated.