Current Regulatory Path Applied to Financial Instruments: Credit Derivatives (Derecho y cambio social.)

Summary

• Outstanding CDS notional rose from about $250 billion in 1997 to a historic peak of about $58 trillion at the end of 2007.p.6
• Credit indices (CDX and iTraxx) now concentrate between 90% and 94% of traded CDS notional.p.7
• Synthetic risk transfer has securitised more than $1 trillion of assets since 2016, with reference portfolios reaching a record of about €260 billion in 2024.p.13
• Brazil's central bank issued Circular BCB No. 3.106 in 2002, setting the first modalities of credit derivatives.p.4
• Resolution CMN No. 5.070/2023 loosened access to bilateral credit derivatives, and B3 announced in June 2023 it would register credit derivatives referenced to Brazilian companies.p.8
• Credit derivative volumes grew at annual rates of about 40% over the decade before the 2008 crisis.p.6

Key insights

1. About half of the global outstanding CDS notional is now cleared through central counterparties.p.5
2. The G-20 agreed in September 2011 on additional requirements and margin standards for derivatives not cleared by a central counterparty.p.5
3. ISDA's Big Bang and Small Bang Protocols (2009) standardised credit events and introduced the credit event auction.p.5
4. Investment fund structures (FIDCs) are regulated by CVM Resolution No. 175/2022 as securities, not as derivatives under the central bank.p.8
5. The COE de Crédito (Resolution CMN No. 5.166/2024) filled a regulatory gap for credit linked notes in Brazil.p.8
6. Synthetic CDOs referenced to subprime mortgages played a central role in the losses of the 2008 crisis.p.11
7. The crisis was multicausal, including excessive leverage, shadow banking growth, concentrated counterparty risk (as with AIG) and rating agency failures.p.17