Wednesday, September 15, 2010
I have repeatedly argued that naked credit default swaps should be banned.
"Naked credit default swaps" is the term coined to describe the situation where the buyer is not the referenced entity.
But the Chinese are being smarter.As Bloomberg notes:
Investors in the derivatives will be required to own the underlying risk, Shi said today in an interview with reporters in New York. China plans to limit the amount of leverage used in the contracts to avoid the kind of financial crisis faced in the U.S. two years ago, he said.
In other words, China will allow CDS, but will prohibit naked CDS.