Credit model meltdown
Dealers are trading increasingly high volumes of bespoke tranches of synthetic credit risk with each other, yet there still appears to be little consensus on the application of credit models. Is there a danger the house of cards may come tumbling down?
The credit derivatives market is growing at a pace unprecedented in financial markets. From a non-existent business 10 years ago, the value of outstanding notionals stood at more than $26 trillion as of June, according to the latest survey from the International Swaps and Derivatives Association. That's more than four times the size of the over-the-counter equity derivatives market.
The development of the market has proven to be a major boon for loan portfolio managers that can synthetically sell
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