Credit-default-swap futures seen as inevitable

As reported by Katy Burne, efforts to create an exchange-traded futures contract tied to credit-default swaps haven’t yet gained traction after 18 months of talks, but banks dealing in the private multitrillion-dollar market for credit derivatives believe such contracts will eventually appear for a simple reason: They should attract new players.

Credit-default swaps function like insurance for bonds and loans. Investors use them to hedge or speculate against changes in a borrower’s creditworthiness. If a borrower defaults, sellers of the protection compensate buyers.

The swaps–traded over the phone or on-screen, with prices known only to trading partners–are the domain of asset managers and hedge funds with the sophistication and financial wherewithal to take on complex risks.

Futures, by contrast, are more routine instruments used by institutions and individual or “retail” investors. Futures prices are displayed publicly on exchanges, and customers can trade them directly with other customers–unlike in the swaps market, where a dealer is on one side of every trade.

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