Complex, opaque, shadowy - the largely unregulated world of credit
derivatives has come to embody all that needs fixing in the broken financial
system.

Concern over banks' exposure to the debt of others through such
products as credit default swaps - a type of insurance against bond default -
has been a major factor behind the collapse of inter-bank lending.

Now calls are growing to bring the multi-trillion dollar credit derivatives
market into the bright sunlight of banking regulation.


When it comes to calls for greater transparency in the credit derivatives
market, world leaders and financial regulators have been falling over
themselves to lend their support.

But for a long time the mantra of light-touch regulation held sway.

In this climate, the privately-negotiated or over-the-counter deals that
characterize
the credit default swap, or CDS market flourished.

Even as banks exposed themselves to more and more credit risk, authorities
remained reluctant to regulate.

It was easy to see why, according to Jan Randolph of Global Insight :
(29s)

Global Insight, head of sovereign risk ,Jan Randolph, saying ;
"While no-one was getting hurt and people were making money they
thought, ' light-touch regulation', we believe they know what they're doing.
Let them carry on. Meanwhile our own government's raking it in. Why should we
stop the party? These are bees making pollen. Why should we interfere in the
situation?"

But it was the over-the-counter aspect of credit default swaps that
exacerbated the financial crisis, for some of the market's main
detractors.

Take the example of Lehman Bros.

Lehman's bankruptcy sparked a huge sell-off on the market because investors
could not accurately gauge the exposure of financial institutions to the
bank's debt via credit default swaps.

Richard Metcalfe of the International Swaps and Derivatives Association
said information on CDS exposure is readily available to investors. (36s)

International Swaps and Derivatives Association (ISDA), Deputy
Regional Director EMEA, Richard Metcalfe saying;

"If you look at the quarterly filings of companies active in this
market, you can see their exposure to derivatives. They mark them to market.
In other words, they look at the current market value."

Metcalfe acknowledges the need for a review of current regulations
governing credit default swaps. But he says the market has already gone some
way in answering its critics, with plans by a number of exchanges to offer a
central clearing system for CDS products. (14s)

ISDA, Deputy Regional Director EMEA, Richard Metcalfe saying;

"As a matter of practice, our member firms actively welcome and
have been pursuing central clearing for credit derivatives for quite some
time, well before the crisis in the lending markets emerged."

For Metcalfe, the CDS market has been a convenient scapegoat for
authorities when the reason for the meltdown in the financial system lies
elsewhere : (8s)

ISDA, Deputy Regional Director EMEA, Richard Metcalfe saying;

"The danger with focusing exclusively on derivatives and in some
quarters demonizing what people don't understand, is that you distract from
some of the rather basic problems you've seen in terms of overextension of
credit. You've seen mortgage fraud to put it bluntly and that is the real root
cause of the problems we've seen in the financial markets over the last twelve
months."

Yet the Lehman debacle may prove to be the winning argument for greater
transparency in the CDS market.

Only now is it beginning to emerge that the payout on credit fault swaps
linked to Lehman's bankruptcy will be much smaller than anticipated.

Where would the markets be now if investors had had a clearer picture from
the start?

Mark Cotton, Reuters.