Faculty Author Type

Emeritus Faculty [Janis Sarra]

Published In

University of Cincinnati Law Review

Document Type


Publication Date



Securities regulation; Credit default swaps; Securities and Exchange Commission


International financial market participants and regulators are watching as the United States attempts to come to grips with the most serious consequences of the crisis in financial markets. Multiple strategies are being used, including bailouts, bank stimulus packages, recapitalization of financial institutions, insolvency restructurings, mortgage programs, guarantees for interbank lending, and direct asset purchases. The causes of the financial turmoil are numerous and complex, but one underlying cause was activities in the credit derivatives market. The fragmentation of regulation over the U.S. financial system, with at least five oversight bodies, has arguably resulted in significant gaps in regulatory oversight. The treatment of credit default swaps is one of them. This Article explores the issue of credit default swaps, and the potential role of the Securities and Exchange Commission (SEC) going forward. Credit default swaps are the most common credit derivative product globally. The figures on the extent of the credit derivatives market vary, but they are all in the tens of trillions of U.S. dollars, of which about 80% are credit default swaps. Credit default swaps have been around for a number of years. They are financial instruments that were originally designed to manage risk exposure. However, a number of shifts in the market, including a radical increase in the speculative aspects of the market, the diminution of credit ratings, and the shift in market share from banks to hedge funds, created problems that eventually contributed to a number of financial failures. The policy question now is how to preserve the positive risk management aspects of credit default swaps while slowing the speculative aspects of the market. In relation to the SEC, the question is, what is its oversight, policy, and enforcement role with respect to such derivatives? This Article is divided into three parts: - a discussion of credit default swaps, their recent role in financial markets and their effects on governance of corporations; - an examination of the role of the SEC historically in respect of derivatives and the current question of whether it should acquire regulatory power over credit default swaps; and - suggestions for additional policy considerations to guide the SEC's deliberations as it charts a course for the future.



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