Glen Scheer's List: Credit Insurance News

• American Airlines: AMR’s filing for bankruptcy protection is expected to force sellers of insurance on the company’s debt to pay up to $367 million to bondholders, one of the few such payouts on so-called credit-default swaps this year

• The European Parliament has approved a ban on this kind of CDS, effective starting 1st December 2011.^[2]
• By the end of 2007, the outstanding CDS amount was $62.2 trillion,^[3] falling to $26.3 trillion by mid-year 2010.^[4]
• A "credit default swap" (CDS) is a credit derivative contract between two counterparties. The buyer makes periodic payments to the seller, and in return receives a payoff if an underlying financial instrument defaults or experiences a similar credit event.^[5][12][16] The CDS may refer to a specified loan or bond obligation of a “reference entity”, usually a corporation or government.^[13]
• • the seller doesn't have to be a regulated entity;
   
  • the seller is not required to maintain any reserves to pay off buyers, although major CDS dealers are subject to bank capital requirements;
• However the most important difference between CDS and insurance is simply that an insurance contract provides an indemnity against the losses actually suffered by the policy holder, whereas the CDS provides an equal payout to all holders, calculated using an agreed, market-wide method.
• Insurance contracts require the disclosure of all known risks involved. CDSs have no such requirement. Most significantly, unlike insurance companies, sellers of CDSs are not required to maintain any capital reserves to guarantee payment of claims.
• Credit default swaps opened up important new avenues to speculators. Investors could go long on a bond without any upfront cost of buying a bond; all the investor need do was promise to pay in the event of default.^[28]
• In November, DTCC, which runs a warehouse for CDS trade confirmations accounting for around 90% of the total market,^[63] announced that it will release market data on the outstanding notional of CDS trades on a weekly basis.^[64] The data can be accessed on the DTCC's website here:^[65] The U.S. Securities and Exchange Commission granted an exemption for IntercontinentalExchange to begin guaranteeing credit-default swaps.

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