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I actually think a model in which CDS can be bought and sold freely but you can only collect the CDS payout by delivering a defaulted bond, would "work" because it would satisfy the needs of both "credit hedgers" and "credit-spread-market hedgers".

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Mon Mar 12th, 2012 at 05:41:42 AM EST
[ Parent ]
Insurable interest is the most basic requirement for any functioning insurance market. Else it is ripe for abuse.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Mar 12th, 2012 at 11:17:24 AM EST
[ Parent ]
If you're not careful, that can lead to a real mess.  Here in the US we probably will never sort out all the "show me the note" issues on mortgages and end up just drawing an arbitrary line.
by rifek on Mon Mar 12th, 2012 at 07:00:11 PM EST
[ Parent ]
That is why you have central property registries and notarised transactions.

If you don't have central registries and notarised transactions, then you are guaranteed to have a mess, irrespective of what instruments you allow to be traded.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Mar 13th, 2012 at 10:30:57 AM EST
[ Parent ]
Except that the notes are not typically recorded or filed.
by rifek on Tue Mar 13th, 2012 at 02:39:05 PM EST
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In that case you do not, in practise, have a central registry of deeds and property.

Breaking such registries is one of the things right-wingers do, because they neither understand nor care to understand the institutional basis for prosperity.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Mar 13th, 2012 at 03:27:32 PM EST
[ Parent ]
Notes have no effect on title.  Only mortgages and deeds of trust do, and those are recorded or there are consequences.  But those are just collateral instruments and don't show evidence of the underlying debt.  Notes, CDSes, and other securities don't have recording systems to readily determine who holds them.
by rifek on Wed Mar 14th, 2012 at 02:52:42 PM EST
[ Parent ]
The whole point of having exchanges rather than simply trading over-the-counter is to have a paper trail of who owns what. If the exchange does not keep track of who owns what securities, then it's not doing its job. And tools that do not do their jobs should be replaced or discarded.

Of course, alphabet soup derivatives are typically traded over the counter rather than on exchange. But that's a bug, not a feature.

In Denmark, notes are notarised and placed in a similar sort of central registry as deeds and titles. But then again, in Denmark, everything is noted and registered and recorded in a central registry somewhere.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Mar 16th, 2012 at 05:39:28 AM EST
[ Parent ]
If a CDS were actually treated like an insurance policy, it would not be tradeable.  The CDS could only be held by the buyer of a named beneficiary, and the payment obligation could be transferred only under highly regulated conditions.  But then no one would score an endless series of commissions.
by rifek on Fri Mar 16th, 2012 at 10:06:15 PM EST
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You need to prevent people from shorting them, because that creates credit risks against the short-seller as well as the original issuer.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Mar 13th, 2012 at 10:21:59 AM EST
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