Killing two birds with one stone

Buyers of credit derivative protection are acutely aware of the two-name issue – the risk that your provider of credit default swap protection goes bust at the same time as the name it is protecting. Ian Clague investigates how market participants are responding to the problem

Users of credit derivatives contracts have always been aware that credit default swaps (CDSs) expose users not only to the name the protection is written on but also to the firm that writes the protection. And it didn’t take long after the advent of the CDS market to see just how closely correlated these two risks can be.

The 1997 Asian financial crisis rammed home the issue of two-name exposure – where sellers of default protection on, say, Korean corporations tended to be Korean banks. So it