Credit Default Swaps Are So Huge That They Can&#39;t Be Banned

Despite regulatory threats on the horizon, the outlook for the credit default swaps (CDS) market remains bright. While the CDS market's notional value of outstanding contracts fell 14% in 2009, it's still at massive $36 trillion of notional value.

Swaps brokers and clearinghouses don't appear worried about its future according to DealBook.

DealBook: ...trading in swaps has so far survived the crisis and market reforms are on the way. Barring unexpectedly draconian regulatory changes, a comeback looks likely, Breakingviews says.

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it looks likely that reforms to improve the market’s workings will trump the idea of shutting it down. With that in mind, forecasting a return to robust market growth makes sense, according to Breakingviews. Central clearinghouses and electronic trading led the energy derivatives market to bloom in recent years. The return of credit risk-taking wouldn’t please everyone, Breakingviews concedes, but the credit-default swaps market could emerge bigger and stronger, too.

Despite the regulatory risk, recent data supports this view that the credit default swaps market will continue to grow. For example interdealer broker ICAP's recent interim results showed that the company's credit-related trading revenue 37% year over year, despite all the scorn.

Thus we'll take DealBook's view a step further -- even draconian regulation won't be able to stop this market's expansion. What you might ban in the U.S. or Europe will simply move offshore.

the end it isn't crazy that bondholders might want to purchase insurance against default. Given the gigantic size of the global bond market and today's technology, someone will find a way to meet this massive need. Thus less regulation would be better than more, since it would keep these markets onshore and under closer supervision.

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