The Incredible Shrinking Credit-Default Swap Market
Five years after almost blowing up the global economy and eight years after making fortunes for Wall Street traders, the credit-default swap market is quietly fading. Rules introduced in the wake of the financial crisis by U.S. and European regulators have led investment banks to withdraw from the market and made trading credit-default swaps and other derivatives more expensive. And with the Federal Reserve keeping interest rates near historic lows, fewer borrowers have defaulted, which means less demand for debt insurance. As a result, outstanding credit-default swaps on individual companies declined by about half, to $13.2 trillion, from 2007 through June 2013, according to the Bank for International Settlements. Dealers once offered $5 billion trades; now $500 million is more typical.
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