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You don't have to have an "insurable interest" in order to buy CDS.

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

by Migeru (migeru at eurotrib dot com) on Mon Mar 12th, 2012 at 04:43:30 AM EST
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