Hedge Funds See Counterparty Risk as a Threat to Global Markets, Expect Another Major Bank Failure

Counterparty risk from credit default swaps (CDS) represents a serious threat to global financial markets, at least in the opinion of 75% of respondents participating in a recent survey conducted by Greenwich Associates, the financial market research and analysis firm. The survey also showed that US respondents were more concerned about the use of CDS, with 85% saying they are a serious threat to global markets. European institutions were slightly more sanguine, with roughly 55% seeing CDS counterparty risk as a significant threat. Moreover, the study also found that following the near collapse of Bear Stearns and its subsequent buyout by JPMorgan Chase & Co., almost 60% of respondents thought another large financial services firm would collapse within the next six months, while 15% believed such a failure would occur within the next 12 months. Only 27% of institutions surveyed think there will not be another Bear Stearns-type collapse. The Hedge Fund Law Report talked to the authors of the survey about their findings, and interviewed leading lawyers about the implications of the survey’s findings for hedge funds.

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