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Potts opinion: Difference between revisions
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Amwelladmin (talk | contribs) (Created page with "{{A|cdd|}}In the primordial times of {{cderiv}} — the Children of the Forest, the First Men and so on — wise people from 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,...") |
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Credit default options differ from insurance contracts because their payment obligation does not depend on the {{cddprov|Buyer}} sustaining or even having a risk of loss. The {{cddprov|Buyer}} need not have an “insurable interest”. | Credit default options differ from insurance contracts because their payment obligation does not depend on the {{cddprov|Buyer}} sustaining or even having a risk of loss. The {{cddprov|Buyer}} need not have an “insurable interest”. | ||
This is so even through it ''could''. Mr Potts did recommended, | 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 in the Helsinki Law Journal] — in that but for this artificial distinction, the contracts can fulfil exactly the same role. | 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 that but for this artificial distinction, the contracts can fulfil exactly the same role. These arguments become ever more pointed as the practical application of 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. | ||