The OTC Credit Derivatives Market

The credit derivatives market is an important innovation that provides significant benefits to the banks and asset managers that use these instruments and to the financial system generally. However, their use entails risks, including counterparty credit risks, that market participants need to manage effectively. Supervisors need to continue to pay close attention to individual dealers' management of the risks associated with intermediating the credit derivatives market and other derivatives markets. They also need to continue to foster collective actions by dealers and other market participants to move rapidly toward the goal of implementing a clearing and settlement infrastructure for the credit derivatives market and other OTC derivatives markets that is as efficient as the infrastructure for more mature markets. Supervisors and other policymakers should encourage the introduction and use of well-designed CCP clearing services for credit derivatives and should encourage greater standardization of contracts, which would facilitate more trading on exchanges.

Source: (FED) Testimony of Patrick Parkinson