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.
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