Banks are quietly settling disputes in the fast-growing credit derivative market to avoid costly and embarrassing legal action. At the same time they face potentially severe risks because of the time they take to settle trades.
Credit default swaps, the most popular credit derivative, allow investors to buy protection against bond issuers defaulting on their obligations. In the event of default, investors deliver the underlying bond and receive pre-agreed money. However, the market lacks some basic transparency standards and is beset by mis-matching.