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- W3124967345 abstract "Is hedging with credit derivatives always beneficial? The benefit of hedging with credit derivatives, such as credit default swaps, is presumed by the Dodd-Frank Act, which excludes hedge transactions from much of the new financial regulation. Yet, significant new risks can arise when credit derivatives are used to manage risks. Hedging, therefore, should be defined not only in relation to whether a transaction offsets risks, but also whether, on balance, the risks that are mitigated—as well as any new risks that arise—are outweighed by the potential benefits. Firms using credit derivatives to hedge often fail to account for the full costs associated with using those instruments. There are numerous risks that can arise. Informational asymmetries and negative externalities, however, make it difficult for firms to accurately assess those risks. Consequently, the far-reaching exemptions for hedge activity provided by the Dodd-Frank Act are inappropriate. Credit derivative hedges must be subject to regulatory oversight, rather than exemption. Regulators of the derivatives markets must consider the risks of hedging with credit derivatives and the inability of firms to account for those risks, as well as the value to firms of mitigating risks with credit derivatives and the costs arising from their use. Among other proscriptions, the types of credit derivatives transactions that can be classified as a hedge should be limited, as * Visiting Assistant Professor of Law, Cornell Law School; B.A., Mount Holyoke College; J.D., Cornell Law School. I am grateful for the insightful comments of Veronica Root, Daniel Schwarcz, Steven Schwarcz, Phyllis Smith, Lynn Stout, and Charles Whitehead. I would also like to thank the participants of the following workshops and conferences for their invaluable input: the Cornell Law School 2012 New Voices in Financial Regulation Conference, the 2013 Duke Law School Emerging Scholars Workshop, the 2013 University of Connecticut Junior Scholars in Financial Services Law Workshop, and the 2013 Lutie Lytle Workshop. Many thanks to the invaluable research assistance of Brenda Beauchamp, Angelina Myers, and Oscar Lopez. All errors are my own. 814 REVIEW OF BANKING & FINANCIAL LAW Vol. 33 well as the size of those positions. In addition, margin and collateral requirements for credit derivatives should take account of the greater risks arising from their use. 2013-2014 HAZARDOUS HEDGING 815" @default.
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- W3124967345 date "2014-01-01" @default.
- W3124967345 modified "2023-09-26" @default.
- W3124967345 title "Hazardous Hedging: The (Unacknowledged) Risks of Hedging with Credit Derivatives" @default.
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