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One way people have proposed to fix the CDS problem is to change the law so you need to deliver a defaulted bond in order to collect on your CDS. That would still allow people to buy CDS to speculate/hedge on the fluctuations of the CDS spread, but you could only collect the payut if you actually own a defaulted security, which you would exchange for the CDS payout. The CDS seller would then have the job of collecting "recovery" on the defaulted bond.
There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
We're at the stage where the financial industry has to be told what it can do and everything else is illegal
keep to the Fen Causeway
I like the way neolibs invent pejorative terms for sensible things they dislike
keep to the Fen Causeway
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.
Friends come and go. Enemies accumulate.
Breaking such registries is one of the things right-wingers do, because they neither understand nor care to understand the institutional basis for prosperity.
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.
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