The Incredible Shrinking Credit-Default Swap Market

By Mary Childs – Five years after almost blowing up the global economy and eight years after making fortunes for Wall Street traders, the credit-default swap market is quietly fading.

Rules introduced in the wake of the financial crisis by U.S. and European regulators have led investment banks to withdraw from the market and made trading credit-default swaps and other derivatives more expensive.

Bankers at JPMorgan Chase (JPM) invented credit-default swaps in the 1990s as a way for investors to protect themselves against loans going bad: One party makes regular payments to another in return for a guarantee to be made whole if a borrower defaults on its debt. What started as a simple hedging tool evolved into a playground for hedge funds and bank proprietary trading desks to speculate on debt, from corporate bonds to subprime mortgages. more>


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