From nakedcapitalism.com:
And I must confess, they sound deceptively appealing (I was a proponent early on) until you dig further into how they would work for CDS. They need to be regulated intrusively, with the intent of shrinking the market considerably over time, and like insurance, with tough capital requirements and frequent examinations of the capital adequacy and claims-paying ability of the sponsor.
Essentially, that CDS should be viewed as insurance and not as an "investment vehicle". Makes sense as CDS allegedly is used to hedge, ie. insure, and us tax payers own AIG since they did not have any where near the collateral to pay off the obligations they received premiums for, ie. insurance companies must have plenty of capital behind their products. Therefore, a Clearing House is not to solution to reign in the CDS market. And to think, this market has been and still is
unregulated.
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