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 Draft legislation being circulated by House of Representatives Agriculture Committee Chairman Collin Peterson of Minnesota would severely curtail trading in the $29 trillion credit default swap market by banning trading of the swaps unless investors owned the underlying bonds. The proposal also calls for all trading in the $684 trillion over-the-counter derivatives market to be processed by a clearinghouse, according to Bloomberg.
With roughly 80% of the trading in the credit default swap market done
by those who don't own the underlying bonds, such a new rule would
basically kill the market, since most companies do not have enough
bonds issued to support the market.
Credit default swaps act like insurance against default on a company's bonds. In the event of default, the swap issuer agrees to pay the swapholder the full amount not recovered on the bonds. Attempts to restrict trading of CDS in the U.S. may not be easy as some hope for though. The efforts would likely result in the immediate relocation of CDS trading to Europe or Asia, doing little to curtail the activity of U.S.-based participants in the marketplace. - George White See Bloomberg story CategoriesComments Deal Video
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Also make the contract of the credit default swap acquired after the date of the new legislation not enforceable in any US court. Then let them trade in Europe or elsewhere for all the good that any such contract would do.