Pressure builds over CDS settlements

International regulators are stepping up pressure on the financial industry to introduce a clearer system for settling contracts after a corporate default in the $45,000bn credit derivatives market.

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The moves come amid growing expectations that corporate bond default rates will rise sharply in the next couple of years. They also come amid signs that some mainstream investors are becoming uneasy about the ability of the CDS infrastructure to withstand a wave of defaults - particularly as settlement procedures are still relatively untested.

Settlement has become a particular concern because the CDS market has expanded so dramatically this decade that the volume of derivatives contracts can sometimes be 10 times bigger than the underlying cash bonds on which the CDS are based.

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In recent years the industry has scrambled to avoid a stampede for cash bonds in these cases by auctions to decide the implicit value of bonds - and then settling the contracts in cash instead.