CDS surcharge touted to aid systemic stability

Charges would encourage systemic banks to buy protection from less significant players

If a highly systemic bank buys protection from a peripheral bank, it shifts risk to a safer place

Systemic stability could be dramatically improved by banning ‘naked’ credit default swaps and imposing systemic-risk surcharges on the rest of the CDS market, according to network simulation-based research.

In a paper published this month in the Journal of Network Theory in Finance, Stefan Thurner, Matt Leduc and Sebastian Poledna, of the International Institute for Applied Systems Analysis in Austria, argue that a completely unrestricted CDS market in which naked CDSs (held by an owner that