CDS market probes

Law Professor Charles Whitehead, a securities-law expert now at BU Law after 20 years as an in-house counsel in international securities and banking, comments on CDS market probes:

“The credit default swap market is a predictive market, meaning that CDS spreads tend to widen in advance of changes in the price of an issuer’s stocks. Why is that? Part of the reason is tied to who is involved in the CDS market. Large banks and other financial institutions are significant participants, often with special insight into the issuers who are involved.

“Thus, manipulating CDS prices — if that, in fact, occurred — may have involved more than simply sending a bad signal about the cost of hedging credit risk. It may have also been an attempt to manipulate the predictive nature of the CDS market, driving stock prices down in light of the apparent (but false) change in CDS spreads.”

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