رفتار استراتژیک در بازارهای مشتقات اعتباری
|کد مقاله||سال انتشار||تعداد صفحات مقاله انگلیسی||ترجمه فارسی|
|17911||2013||7 صفحه PDF||سفارش دهید|
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Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : International Journal of Industrial Organization, Volume 31, Issue 5, September 2013, Pages 652–658
This paper reviews recent research at the intersection of industrial organization and corporate finance on credit default swap (CDS) markets. These markets have been at the center of the financial crisis of 2007–09 and many aspects of their operation are not well understood. The paper covers topics such as counterparty risk in CDS markets, the "empty creditor problem," "naked" CDS positions, super-senior status of credit (and other) derivatives in Chapter 11 bankruptcy, and strategic behavior in CDS settlement auctions.
One of the most significant changes in financial markets during the decade preceding the crisis of 2007–09 was the creation and subsequent exponential growth of the market for credit insurance, particularly credit default swaps. From relatively small beginnings of around $180 billion in 1997,1 the CDS market has grown, according to BIS statistics, to over $32 trillion in notional amount in mid-2011. At its peak in 2007 the CDS market exceeded $58 trillion in notional amounts and has since shrunk in size partly due to the impact of the financial crisis and partly due to new netting rules.2 A credit default swap (CDS) is essentially an insurance contract against losses incurred by creditors in the event that a debtor defaults on its debt obligations. The contract is between a "protection buyer" and a "protection seller." As part of the contract, the protection buyer pays a premium (the CDS premium) to the protection seller, in exchange for a payment from the protection seller to the protection buyer if a "credit event" occurs on a reference credit instrument within a predetermined time period. Common credit events are bankruptcy, failure to pay, and, in some CDS contracts, debt restructuring or a credit-rating downgrade. However, while a CDS is similar to an insurance contract, a fundamental difference between a CDS and a traditional insurance contract is that a CDS offers a payment from the protection seller to the protection buyer even when the buyer is not a holder of debt referenced in the CDS contract. In contrast, a traditional insurance contract typically offers coverage only for damages incurred (the insuree must have "insurable interest"). In other words, in contrast to traditional insurance, a CDS contract can be "naked" (i.e., it provides payment in case of a credit event even without any underlying credit exposure on behalf of the insuree). Credit default swaps were at the heart of the financial crisis of 2007–09, and they have continued to be a major focus of attention in the aftermath of the crisis, in particular in the context of the European banking and sovereign debt crises. One major issue is the fact that credit default swaps are typically traded in opaque over-the-counter markets and the financial crisis has revealed the hazards involved in the buildup of systemically important risks in a few undercapitalized institutions under the radar screen of regulators charged with maintaining financial stability. Prior to the recent financial crisis, the finance literature on CDS markets mostly focused on the pricing of CDS contracts. Typically, in these pricing models CDS markets are (essentially) frictionless and competitive. The general view of this literature is that CDS are a valuable financial innovation, because they provide new or cheaper forms of value-enhancing risk-sharing opportunities (see Jarrow, 2011). However, given that CDS pricing models, like most other derivative pricing models, value the CDS via a replicating portfolio comprising a long position in the underlying bond and a short position in a Treasury bond (with similar coupons, maturity, and notional value), it is not clear that the CDS offers risk-sharing opportunities that were not available before. In fact, in the frictionless pricing model, the CDS is a redundant security. Once trading frictions are introduced, as with other financial derivatives, the main added value of the CDS is to lower transaction costs in building a hedged position. However, beyond the potential reduction in transaction costs, CDS contracts usually do not affect economic outcomes in these pricing models. Indeed, one of the main benefits of CDS is that they make it easy and rather safe to short a risky debt instrument. Unlike a short position in a stock, which subjects the holder of the position to potentially large losses should the underlying stock price move up rather than down, a CDS contract limits the exposure of the protection buyer to the payment of the running premium. The worst outcome for a CDS protection buyer is that there is no default on the underlying debt instrument. In that case he would have paid for protection, which in the end was not needed. In contrast, a short seller of stocks risks losing the difference between the price at which he must purchase the stock (to be able to deliver it) and the price at which he sold the stock. This price difference can be huge in the event of a short squeeze (a recent example is the Volkswagen–Porsche short squeeze of 2008, in which short sellers incurred substantial losses). 3 This limited downside risk for CDS protection buyers is particularly attractive when the buyer purchases protection over long maturities. The crisis of 2007–09, however, has shown that CDS markets are far from frictionless and that considerable strategic conduct has been present in these markets. A growing recent literature on CDS markets thus attempts to explore the economics of CDS markets using models with frictions, in which the CDS is not redundant and in which there may be significant scope for strategic behavior. Rather than frictionless and competitive, this literature thus examines frictions in CDS markets and allows for strategic conduct (or misconduct). The most egregious misconduct arguably took place at the AIG Financial Products (AIGFP) unit in London, which sold default protection on a massive scale to the point of building a net exposure of $411 billion in CDS on super-senior tranches of securitized loans and mortgages, all rated AAA by June 30, 2008 (see Stulz, 2010). AIGFP was able to take on such an exposure without posting a commensurate amount of collateral (to reduce counterparty risk for the protection buyers) due to the fact that AIG had an AAA rating. Although AIGFP could avoid posting collateral by relying on the AIG AAA rating, it were still exposed to the risk of collateral calls in the event that AIG were to lose its AAA rating. However, while the pricing model used by AIGFP for its CDS positions “harnessed mounds of historical data to focus on the likelihood of default…as AIG was aware, [the] models didn't attempt to measure the risk of future collateral calls or write-downs, which have devastated AIG's finances.”4 In light of the AIG debacle, it is not entirely surprising that the post-crisis literature on credit derivatives has focused attention on the moral hazard problems involved in writing credit default insurance. We thus begin with a discussion of this issue in Section 2. We then turn to another form of moral hazard created by CDS insurance – the "empty creditor problem" – in Section 3. In Section 4, we address potential strategic concerns arising from the fact that the buyer of CDS protection may have a "naked" position in the CDS. In Section 5, we discuss the highly concentrated, oligopolistic nature of over-the-counter CDS markets and the considerable market power that the handful of investment banks dealing in this market seems to wield. In Section 6, we point to the special treatment for CDS and other derivative contracts in bankruptcy and discuss the implications of this special status for financial stability. In Section 7, we discuss how CDS contracts are settled in the event of a credit event, with a focus on the complex strategic bidding considerations that arise in CDS settlement auctions, which have become the standard settlement procedure for CDS contracts. Finally, Section 8 offers some concluding comments on the regulation of CDS markets and points to some current policy questions that warrant further research.
نتیجه گیری انگلیسی
This short review of recent research on strategic conduct in CDS markets highlights that, while CDS markets have grown to play a major role in the economy, and while some important issues relating to strategic conduct in this market have been identified, the economics of CDS markets are still imperfectly understood and many open questions remain for future research. The burgeoning literature reviewed here has only scratched the surface and each of the topics discussed above still requires deeper analyses. Going forward, there are three major policy initiatives that are likely to affect CDS markets substantially. The first is the implementation of the transition of standardized CDS away from OTC markets to central clearing platforms. Biais et al. (2012a) build on their earlier model of optimal insurance contracting in the presence of counterparty risk to analyze the costs and benefits of OTC markets versus trading on a CCP. They show that when the CCP is optimally designed, the CCP dominates OTC markets. The reason is that in general a CCP can make more efficient use of the mutualization of counterparty risks. Unfortunately, it is far from clear that current CCP proposals are designed optimally (i.e., maximize the benefits of mutualization). One specific concern, for example, is that the CCP itself may become a source of systemic risk, should rules on margin requirements be poorly designed. This is why the Dodd–Frank Act of 2010 includes provisions that require the Financial Stability Oversight Council (FSOC) to monitor CCPs and allows the FSOC to put any CCP that is a threat to financial stability under the supervision of the Federal Reserve Board. Another potential design flaw of existing CCPs is that they are far from transparent and thus may continue to protect the oligopoly rents of the large dealers (see Bolton et al., 2012). The second major initiative is the implementation of restrictions on proprietary trading by banks via the so-called Volcker Rule.13 To the extent that trading in CDS is not a hedging but a speculative activity, dealer banks may face restrictions in their CDS trading. This issue rose to prominence in the spring of 2012 with the disclosure of massive losses from CDS positions incurred by JPMorgan Chase (through the so-called London Whale).14 The third major policy question for the coming years concerns the special status of derivatives and swaps in bankruptcy or bank receivership. As pointed out above, current regulations give banks inefficient incentives to rely on funding through swaps and repos for their financing as opposed to more stable funding sources such as long-term unsecured bond financing. This is a major loophole in existing financial regulations, which seek to eliminate moral hazard in lending to banks. Left unchanged, this loophole could make short-term wholesale funding through repos even more the preferred source of cheap funding for banks in the next lending boom.