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Introduction
Keeping up with the frenetic pace of the credit derivatives market isn't easy.By the end of 2004, the notional outstanding of credit default swaps (CDSs) grew to $8.42 trillion. This represents an annual growth rate of 123%, according to figures from the International Swaps and Derivatives Association. Market growth and product innovation happen so quickly that, sometimes, risk management practices and technology have a hard time catching up.
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The General Motors and Ford Motor Company downgrades in early May are a good example demonstrating how dealers are playing catch-up to the market they created. At the time, the resulting dislocation between equity and mezzanine tranches prompted some dealers to rethink their correlation models, illustrating how the credit derivatives market is growing faster than banks' and investors' risk management tools.
And with trading volumes climbing ever higher, the backlog of unconfirmed trades has also
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