Credit derivatives have been a positive development for the global financial system, facilitating enhanced risk transfer and dispersion, according to a global credit derivatives survey published by Fitch. While credit derivatives have been beneficial as a risk transference tool, the report identifies weak disclosure standards, the potential for unanticipated risk concentrations and the role of hedge funds as potential areas of concern. ‘On balance, we believe that credit derivatives have been beneficial for the market,’ said Roger Merritt, managing director, Fitch Ratings. ‘Nevertheless, the agency believes there are risks that bear watching, including low financial transparency, informational asymmetries, potential risk concentrations and the possible promotion of new forms of moral hazard within the banking system as the linkage between origination and management of credit risk becomes more attenuated. Further, traditional measures of financial strength and performance are at risk of becoming increasingly distorted in the absence of a minimum standard of disclosure regarding credit derivatives activities.’
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