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Watch derivatives, warns Bank

David Clementi

David Clementi, deputy governor at the Bank of England, says the use of credit derivatives in securitization poses a threat to capital market stability.

In the closing address to the International Bond Congress in London, Clementi surprised borrowers, investors and bankers with his concerns at the rapid growth of credit derivatives and ABS markets, which many banks hope compensate for the shrinking returns in bond trading and underwriting.

Clementi said there was a danger of a lack of transparency in the market, because of the increase in the use of synthetic CLOs, where the risk attached to loans and bonds is sold on without a sale of the assets.

"These markets mean that a bank need no longer remain exposed to its main customers but can rapidly take on large exposures to other credits without any new borrowing by the underlying entities," he said.

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