The biggest U.S. banks are the biggest dealers, controlling 96% of the swaps market.
The only way to hedge that debt was to buy default insurance via the swaps market.
Banks that own corporate bonds may use the swaps market to hedge against a company defaulting.
Had AIG been allowed to go bust, the swaps market might well have unravelled.
The cost of buying insurance against default by GM increased by 10% in the credit-default swaps market.
Swaps trading is a huge enterprise for the big U.S. banks, who control 97% of the trillions-dollar swaps market.
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But perhaps the best, because it is the most liquid, is to look at options on the swaps market.
In the swaps market, in particular, it seems more attractive to receive floating interest rates and to pay fixed rates.
And paying or receiving fixed in the swaps market is another much-used tool with which the two agencies hedge their mortgage portfolios.
They are identifying their requirements, looking at their particular role in the swaps market and many are putting in voice recording solutions.
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Insiders say the biggest exposure may be in the interest-rate swaps market, which is many times larger than those for credit derivatives.
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Further evidence that the mortgage giants were mostly responsible for the sharp rise in yields can be found in the interest-rate swaps market.
The changes mostly affect JPMorgan Chase, Citigroup, Goldman Sachs, Bank of America and Morgan Stanley, who make up 97% of the swaps market.
Those two businesses are about 90% of the swaps market anyway.
The challenge for regulators is to impose more structure on the swaps market without limiting innovation in instruments that funds and other investors have found useful.
Bill prices receded by seven ticks and the swaps market pointed to additional central bank tightening of 27 basis points over the next 12 months compared to 18 basis points earlier this week.
The dismay of investors was quickly apparent in the market for credit-default swaps (see chart) and in the equally active market for gossip.
Though considerably shy of the of 20 plus trillion dollar market for credit default swaps (derivatives also capable of mass destruction), pools of single-family homes wrapped in mortgage-backed securities blankets dwarf all other tradeable instruments.
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One of the ways the market measures credit risks is by looking at the spreds of credit default swaps, a default insurance derivatives market that measures the risk of buying foreign bonds as compared to buying a comparable maturity from the US Treasury.
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Contagion also spreads through the market for credit-default swaps.
The top five U.S. banks, which enjoy both privileges, control 97% of swaps trading in a market worth trillions of notional value.
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Another loophole is used by companies: in a market known as blue-chip swaps, they buy dollar-denominated sovereign bonds in pesos, transferring them to the United States where they sell them for dollars.
Another news story that was blown out of proportion was the notional value of credit default swaps and the power of those swaps to keep the stock market headed downward, during the recent bear market.
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Since the market collapsed, far fewer credit-default swaps have been issued.
So it's a safe bet that the era of American dominance will not be brought to a close by credit default swaps, mark-to-market accounting or (even) Barney Frank.
Take, for example, one indicator of the market's appetite for risk, the spread between swaps of fixed- and floating-rate interest payments (see chart).
The decision came as part of the Dodd-Frank act which mandated that the CFTC write rules to regulate the swaps, or over-the-counter market, in addition to their oversight of the futures market.
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AIG's collapse stemmed largely from its array of exotic financial products such as credit-default swaps, which went sour when the U.S. housing market turned south after 2006.
This market also already fell under the umbrella of the Securities and Exchange Commission, when swaps did not.
In fact, according to CreditSights, credit default swaps (CDS) which measure the risk of default actually tightened (showing the market sees reduced default risk) 15-50 basis points, or from 0.15-0.50%.
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