Dealers call for ban on downgrade triggers

Banks struggling to price the risk that downgrade triggers may be exercised, leading to calls for regulators to prohibit their use in derivatives documentation

Policeman in front of no entry sign

Regulators should prohibit rating downgrade triggers within derivatives contracts, as they could pose systemic risk in concentrated markets, dealers warn.

Downgrade trigger options allow a client to terminate a trade when a counterparty breaches a pre-specified rating level, and force the downgraded party to stump up the replacement cost. The problem is that no-one can know for sure what that will be, and it is likely to be much higher in stressed market conditions, or in asset classes that are

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