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{{A|cdd|}}In the primordial times of {{cderiv}} — the Children of the | {{A|cdd|{{image|Robin Potts|jpg|Jedi Master Pobin Rot-Squeue Sie with his sacred scroll sabre}}}}In the primordial times of {{cderiv}} — the [[Children of the Woods]], the [[First Men]] and so on — wise people from [[J.P. Morgan|JP Morgan]] and {{icds}} worried that a [[credit derivative]] might be able to be characterised as an [[insurance contract]]. Bad for many reasons, not least of which that offering insurance is regulated business, requiring compliance with capital rules and so on. | ||
The [[First Men]] did what prudent pioneers of financial products do, and sought wise counsel. In this case, a Mr [[Robin Potts QC]], who in 1997 opined that a credit derivative should not be characterised as an insurance contract, because as it is generally structured to pay out upon a {{cddprov|Credit Event}} | The [[First Men]] did what prudent pioneers of financial products do, and sought wise counsel. In this case, a Mr [[Robin Potts QC]], who in 1997 opined that a credit derivative should not be characterised as an insurance contract, because as it is generally structured to pay out upon a {{cddprov|Credit Event}} occurring to the {{cddprov|Reference Entity}} whether or not the buyer is exposed to the {{cddprov|Reference Entity}} or otherwise suffers any loss. | ||
At common law an insurance policy is “a contract to indemnify the insured in respect of some interest which {{sex|he}} has against the perils which {{sex|he}} contemplates it will be liable to.” | At common law an insurance policy is “a contract to indemnify the insured in respect of some interest which {{sex|he}} has against the perils which {{sex|he}} contemplates it will be liable to.” | ||
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This is so even through it ''could''. Mr Potts did recommended, [[for the avoidance of doubt]] that counterparties include a clause stating that they do not mean to enter into an [[insurance contract]]. I mean you could, obviously, but there is a [[Hamlet’s mum]] aspect to that, and there would be nothing to stop a buyer of an ''actual'' insurance contract stating it did not mean it to be an insurance contract. | This is so even through it ''could''. Mr Potts did recommended, [[for the avoidance of doubt]] that counterparties include a clause stating that they do not mean to enter into an [[insurance contract]]. I mean you could, obviously, but there is a [[Hamlet’s mum]] aspect to that, and there would be nothing to stop a buyer of an ''actual'' insurance contract stating it did not mean it to be an insurance contract. | ||
The Potts opinion is not without its critics — see [https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1775852 Oskari Juurikkala’s impassioned arguments from 2011 in the Helsinki Law Journal] — in | The Potts opinion is not without its critics — see [https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1775852 Oskari Juurikkala’s impassioned arguments from 2011 in the Helsinki Law Journal] — many of which make the point that, from the ''[[Buyer - Credit Derivatives Provision|Buyer]]’s'' perspective an insurance contract and a credit derivative behave in exactly the same way. Why should there be a different regulatory treatment just because the insured does not need to have an insurable interest if, in practice, it has one? | ||
Then again, an outright gamble is exactly the same. I could buy insurance on my house burning down, buy a derivative compensating me for the loss in value if it does, or you could just have a bet with me that it won’t. If the payoff is “total loss of value in the house” the contracts are, for all intents, the same. | |||
These arguments become ever more pointed as the practical application of [[Credit derivative|credit default swaps]] became clear: they are hedging tools, not speculative instruments; that is how people use them; for the most part the fact that one could use them to speculate does very little to advance the practical fact that in the real world, most people don’t. | |||
{{sa}} | {{sa}} | ||
*[[Credit Derivatives Anatomy]] | *[[Credit Derivatives Anatomy]] | ||
*[[Equity v credit derivatives showdown]] | *[[Equity v credit derivatives showdown]] |