The ECB publishes Credit Defaul Swap and counterparty risk

This report first provides an overview of the various CDS markets, looking at: the main CDS products and their use; historical developments; the main players; and the structure of the market.The second chapter outlines sources of counterparty risk for CDS instruments, discussing the following specific risks: wrongwayrisk; jump-to-default risk; liquidity risk; concentration risk; and systemic risk. A broad assessment of current exposure to counterparty risk in Europe has been undertaken, building on data which have not been publicly available in the past.In addition, the materialisation of the various types of counterparty risk will be described in relation to the failures of AIG and Lehman Brothers.The report will then assess the use of CDSs for hedging or trading purposes, before turning to the impact that CDSs have on the real economy via the cost of funding and access to credit. The use of CDSs as leading indicators during the current crisis will then be reviewed, since CDSs are frequently referred to as barometers for the pricing of risk and are increasingly having an impact on the financing costs of both corporations and governments.The report will conclude with a review of current market initiatives and regulatory initiatives for the CDS market following the outbreak of the crisis and the failure of Lehman Brothers in particular.