Credit Swaps Polished in $19 Trillion Derivative Overhaul
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The biggest overhaul to the $19 trillion credit derivatives market in more than a decade will seek to solve flaws that have stopped some contracts paying out as buyers anticipated.
The changes come too late for investors in the junior debt of Banco Espirito Santo SA, whose credit-default swaps were devalued this month when the Portuguese lender was rescued and restructured by the government. Since the contracts are tied to the majority of a company’s debt, if the borrower is reorganized the swaps don’t necessarily stay tied to the securities they’re meant to protect.