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Bonds Are a 'Safe' Investment: A Big Lie Gets Even BiggerNow at last we will have some transparency in the CDS (credit default swaps) markets. Regulators approved a joint venture between the CME (Chicago Mercantile Exchange) and Citadel, a hedge fund to clear swaps trades that will begin operations within 30 days. The size of this market is mind boggling at 54,000 billion dollars.
One of the underlying factors in our current credit crisis has been the lack of supervision in the CDS markets. Very often it was difficult and nearly impossible to figure out who the players were. You had the original parties to the CDS and then you had speculators who gambled on the credit worthiness of the underlying bond.
While this move to clear CDS trades is a good thing, it does not eliminate the speculation and risk taking by traders in the swaps market. That may never go away but at least it will be easier for trading managers to monitor their trader's actions more closely.
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