Over the past few years, credit derivatives have been blamed for pretty much everything. Collapse of AIG? Sold too many credit derivatives. Investment banks going down? Structured and held too many credit derivatives.
The derivatives industry is apparently getting sick of everybody blaming everything on derivatives. The International Swaps and Derivatives Association today lashed out with a strongly worded comment in which it argues "it's time to stop the nonsense" that the organization says is being spread about credit default swaps.
"It’s hard to overstate the amount of nonsensical chatter on credit default swaps (CDS) in the past few days," ISDA wrote.
ISDA argues the market is no longer opaque, nor as powerful as many believe, at least in the case of Greece.
CDS were once opaque, no doubt about it.
But since 2008, ISDA says, there has been a warehouse of information that captures 98 per cent of CDS trades, giving a picture of the market to regulators. (Here's a link to that web site.)
The data site show that the market in Greek CDS is hardly the size to trigger massive financial ripples should the swaps eventually be triggered. (Credit default swaps are meant to be insurance against a bond's default. In the event the bond does default, the seller of the swap has to pay out the full value of the bond to the buyer. In return, the seller gets a stream of premiums.)
The net exposure to Greek CDS contracts globally is $3.7-billion (U.S.), according to the database. That's not a big number, and what losses there would be to sellers would largely be covered by collateral, ISDA argued. The upshot is, given there are many sellers, nobody's likely to go bankrupt paying out claims on Greek CDS.
Which of course, is pretty rich, since ISDA is the one that has declared that nobody is going to be able to make claims on their CDS for Greece under the terms of the Greek debt restructuring that Europe is working on.
ISDA is taking the view that the restructuring of the Greek debt that's been proposed is a voluntary one, and won't trigger the outstanding CDS in any case. That's a view that's infuriated people who bought CDS as a hedge against their sovereign debt holdings, as it essentially means their insurance is useless.
So even as ISDA defends the market on Greek CDS, it has also, in the eyes of many, damaged it severely.