Introduction

Jon Gregory

All opinions expressed herein are those of the author and do not necessarily reflect those of his employers, past or present.

Financial derivatives and especially credit derivatives have experienced tremendous growth in recent years. Derivatives play an important role in improving the growth and efficiency of the global economy but can have potentially enormous risks, as highlighted by the 2001 collapse of the energy giant Enron. Warren Buffet, the legendary investor, has recently labelled derivatives “financial weapons of mass destruction”, a remark that has received much attention in the markets and media. Mr Buffet’s concerns extend to credit derivatives, specifically that there are large amounts of credit risk concentration. Alan Greenspan, chairman of the Federal Reserve, has taken an almost diametrically opposite view by stating that credit derivatives have helped make the economy shock-resistant and potentially diffuse losses arising from a major default such as Enron.

It is clear that there are hurdles to the development of the credit derivatives market, which can be compared, for example, to the OTC interestrate derivatives market of around 15 years ago. The measurement

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