ABA Section of Business Law
eSource
"Decoupling" Issues in Bankruptcy
- This article provides a basic understanding of the mechanics of a credit default swap (CDS) and touches on several issues that a CDS creates in bankruptcy and in out-of-court workouts, given that economic rights in these instruments have been decoupled from contractual rights normally associated with the underlying debt. A CDS permits parties to hedge against credit risk by transferring the inherent risk of purchasing a credit instrument to another party. The rapid growth of the CDS market has caused many to question the unintended consequences CDSs have, or at least may have, on financially distressed companies.
