Zhang, C. (2018) Mitigating or exacerbating the risk: A critical analysis of credit default swaps applied in private equity industry. International Company and Commercial Law Review, 29(1), pp. 51-60.
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Abstract
As one of the most widely used credit derivatives, credit default swaps (CDSs) have been playing a significant role in global capital market. Although the use of CDS contracts has markedly decreased since the crisis from 2007,1 CDSs are still favoured by institutional lenders to transfer their great credit risk. In the most risky sectors of financial market, such as leveraged buyouts (LBOs) and syndicate loans, quite a large number of lenders utilise CDSs as a part of their key contractual techniques to secure the transactions. Owing to the inherent possibility of financial speculation in CDS contracts, however, their legal nature and their potential risks are likely to be ignored. Private equity (PE) funds being one of the risky financial investment vehicles, the general partners or fund managers will have a strong motivation to apply CDS contracts to make their fund safe. However, meanwhile, the excessive use of CDSs may exacerbate the irrationality and speculation of the PE market. This article aims to analyse the basic rationale and legal nature of CDS contracts based on contract law theory and to discuss the potential risk through its practice in PE transactions.
Item Type: | Articles |
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Keywords: | Credit default swaps, private equity, financial regulation, systematic risk |
Status: | Published |
Refereed: | Yes |
Glasgow Author(s) Enlighten ID: | Zhang, Dr Chi |
Authors: | Zhang, C. |
College/School: | College of Social Sciences > School of Law |
Journal Name: | International Company and Commercial Law Review |
Publisher: | Sweet and Maxwell |
ISSN: | 0958-5214 |
ISSN (Online): | 0958-5214 |
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