The Analysis Of U.S. Credit Default Swap Market’s Development

The rise and development of the U.S. credit default swapmarket is noticeable in the international financial market whichbrought a huge impact to the U.S. and global financial markets.With the deepening of economic globalization, the development ofChinese credit default swap market is significance to accelerate theconnection of a major port and international standards in thefinancial markets.In this thesis, through the specific analysis based on the theory,characteristics and macroeconomic development of the U.S. creditdefault swap market, I sum up the general laws and makerecommendations to our credit default swap market development.Credit default swap that created by JP Morgan in1995whichwas trading for its own low-cost, flexible contracts, effective transferof credit risk and helping investors hedge and etc., was soon occupying a major share of the financial derivatives market in theUnited States and had became the most representative financialinstrument in the markets. In1999, the International Swaps andDerivatives Association published the first version of credit defaultswaps’ standard contracts. According to the change of the situationin credit default swap market and the global economic environment,the International Swaps and Derivatives Association modifiedissues in2003and2009in order to ensure the steady developmentof the credit default swap market. The real estate market hadstarted its rapid development since the United States cut interestrates in2000. Home mortgages as asset-based securities resale inthe secondary market and concentrated much credit risk whichmarket participants signed credit default swap contracts in order totransfer. Because of it, the credit default swap market developedsharply.While the rapid development of the market, credit defaultswaps from risk transfer tools had became speculative instruments with highly leveraged and too complex structure. Because of theenormous economic benefits in the credit default swap market, theU.S. government did deregulation. The market’s self-regulatorysystem was not perfect yet, the risk management was over-relianceon mathematical models and over the counter was either opaque.The second half of2007, the U.S. real estate bubble began tobreak down. Market participants underestimated the risk ofcounterparty default risk. Then series of default events occurred,for example, Lehman Brothers was bankrupt, Freddie Mac andFannie Mae were purchased by government. International financialcrisis outbroke finally in2008. U.S. credit default swap market’scapacity decreased in2009. People began to re-understand thecredit default swap market with adjusting market regulatory systemand risk management. International Swaps and DerivativesAssociation in April2009made a wide range of reforms on tradingmechanism of credit default swaps, also known as the CDS bigbang. After adjustment, the U.S. credit default swap market had entered a period of steady development, and continues to today.By analyzing the process of the credit default swap market’sdevelopment combined with historical experience of thedevelopment of the Chinese financial derivatives market and itsinternal and external market environment, I point out that even if thedevelopment of the Chinese financial derivatives marketenvironment system has been formed, there is still a lot of problems.For example, slow market developing, poor market pricing ability,lack of the relevant legal system and poor internationalcompetitiveness. In this thesis, I make some suggestions aboutnational credit default swap market’s development. Theserecommendations depend on some reports made by NationalAssociation of Financial Market Institutional Investors about creditdefault swap market. We must make trading regulatory accordingto national conditions, let business dealers diversification,strengthen the market pricing analysis capabilities and practice practitioners’ professional skills in order to develop the creditdefault swap market better.