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notional amount of outstanding credit default swaps, according to Bank of Japan data |
When you buy a credit default swap, you know what you’re getting: a derivative that pays out if the underlying instrument defaults. But one of the curious spillovers of the global financial crisis is a controversy about who decides whether or not something has defaulted, and how that is decided.
This came to the fore in Japan in October over the fate of the Japanese consumer finance house Aiful. In September, Aiful said it would suspend loan payments and apply for alternative dispute resolution. It also said it was in negotiations with creditors. This was enough for Standard & Poor’s to declare a selective default on Aiful, which naturally caught the attention of the many hedge funds and other holders who had credit default swaps with Aiful debt underpinning them.
On October...
