Research Of Credit Default Swaps' Regulation

Credit default swap is a kind of credit derivatives, since it has been existed for more than ten years, CDS's scale expanded rapidly, and its character has changed. It is these changes that increased the risk of credit default swaps, and made CDS play a significant negative effect on the global financial crisis.In the beginning of this paper, I introduced credit default swap's basic meaning and operation. I focused on the character of CDS, which is a kind of financial derivative instruments. With the continuous development, it changed into bare CDS, which is not based on the physical assets. The change of this character brought CDS's greater risk.In the next chapter, I discussed the necessities of CDS's regulation from the view of risk control. First, I analyzed the effect CDS played in this financial crisis. CDS enlarged the risk, and expanded the risk of transmission between different financial institutions. Next, according to CDS's effect in the financial crisis, and it's own particularities, I think CDS's risks can be divided into three kinds:CDS pricing model defects, risk caused by the absence of regulation, lack of assets and so on. The facts caused these risks, include the disadvantages of credit rating system, its scale is too large, the trading is speculative excess, too extensive participants, and lack of regulation. Among these factors, in addition to the factor that lack of regulation direct requires the establishment of CDS's regulation, other sources of risks also should be resolved under the regulatory system. Through the effective regulation of CDS, it is able to defuse risks, and to safeguard the entire financial market stability. Therefore, in the end of this chapter, I explained the necessities of CDS's regulation. The first, CDS impacts on the financial market heavily. The second, CDS has great risks and common participants. The third, the market of CDS is easy to have bubble. The three ask for the regulation of CDS. And the forth, lack of risk management by financial institutions requires external regulation.The third chapter described the regulatory approaches of financial derivatives. The regulatory system is divided into two kinds which are government type and self-regulation type, both of two types have their own advantages and disadvantages. I think, for CDS market, just relying on self-regulation is too weak to get a good regulation result. It is better to combine these two types, and the government's regulation is more important, which still conform to the current world's financial regulatory system trends.OTC derivative has different regulatory approaches, divided into domestic and foreign regulatory approaches, and domestic one involves multi-national regulatory approach and single regulatory approach. Different regulatory and supervisory systems lead to different regulation measures and difficulties. These differences are decided by the conditions of a country, so the regulation measures of a country should meet the idiographic requires of this country's regulatory system and OTC derivative regulation approach.The fourth chapter is the introduction of CDS specific regulatory measures. Regulatory system and regulation approach are more macroscopic notions than regulation measures, they are in the view of the whole financial market. Under this regulation system, just through specific measures can make the whole regulation frame integrity and operable, in particular, to reflect the CDS's differences from other financial derivatives. Because of the lack of relevant practice in China, I mainly described regulatory measures in the major CDS market, the U.S. and European. The United States and some European countries are implementing a different financial regulatory systems and OTC regulation approaches, so the two have different regulatory measures. Compare the two areas, I find that both of them same measures, embodying in these aspects:to reduce counterparty risks, to reduce operational risk, to increase transparency, to strengthen market integrity and regulatory and so on. For us, all of these measures should be means of reference.Since China founded the credit derivative market, the CDS trading began to develop in China. In the fifth chapter, I described the process of CDS's development in China briefly, and combined with our status quo in regulation area, I pointed out that our country's regulatory system had many disadvantages, embodying the absence of relational laws, and regulatory bodies are too much; lack of information disclosure; transparency is low, and lack of proper supervision system and other issues. The foreign regulatory practices give us references and experiences. Finally, I gave several proposals in the establishment of our CDS's regulatory system, including:Strengthen legislation and information disclosure, increase transparency of transactions, take more risk control measures, strengthen self-regulation, improve the credit rating market, strengthen international cooperation.etc.