The fear of being naked

Walking into a counterparty default without the ability to cut and run will be a new - and scary - experience


To help fix the too-big-to-fail problem, regulators are asking a group of 18 dealers to do something that does not come naturally – give up a deeply out-of-the-money put option.

The option in question is embedded in the International Swaps and Derivatives Association's master agreement, and allows trades to be terminated in the event of a counterparty defaulting – the surviving party can cut and run, without being dragged into drawn-out, messy bankruptcy proceedings.

It's an option that was

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