2007 Financial Markets Conference Agenda - Credit Derivatives: Where's the Risk?

Monday, May 14

Welcome
Dennis P. Lockhart, President and Chief Executive Officer, Federal Reserve Bank of Atlanta

Tuesday, May 15

Convene conference and introduce keynote speaker
Dennis P. Lockhart, President and Chief Executive Officer, Federal Reserve Bank of Atlanta

Keynote speaker
Regulation and Financial Innovation off-site image
Ben S. Bernanke, Chairman, Board of Governors of the Federal Reserve System (via satellite)

Session I: "Credit Derivatives: An Overview" pdf document
Arising from financial institutions' need to hedge and diversify credit risk, credit derivatives have now become a major investment tool. Almost all credit derivatives take the form of the credit default swap, which transfers default risk from one party to another. Most credit default swaps were once written on single names, but since 2004 the major impetus to growth and market liquidity has been credit default swaps on indexes. This paper notes that, in their early years, the major challenges facing credit derivatives involved resolving ambiguities in reference entities and in definitions of credit events. Since the introduction of index trading and the widespread entry of hedge funds, however, the challenges have been settlement after credit events and addressing operational backlogs stemming from an increase in novations. Now that hedge funds are an established part of the market, the next important issue is likely to be whether credit derivatives activity will move to exchanges.

Moderator
Cathy E. Minehan, President and Chief Executive Officer, Federal Reserve Bank of Boston

Presenter
David Mengle, Head of Research, International Swaps and Derivatives Association Inc., New York
Presentation pdf document

Discussants
Anthony M. Santomero, Senior Adviser, McKinsey & Company, New York
Presentation pdf document
Eric Beinstein, Head of Corporate Quantitative Research, JPMorgan, New York
Presentation pdf document

Session II: "Credit Derivatives and Risk Management" pdf document
The striking growth of credit derivatives suggests that market participants find them useful risk-management tools. This paper illustrates credit derivatives' value with three examples: a commercial bank using credit derivatives to manage loan portfolio risk, an investment bank using them to manage the risks of underwriting securities, and an investor using them to align credit risk exposure with a desired credit risk profile. But credit derivatives pose their own risk-management challenges. They can transform credit risk in intricate ways and, under certain conditions, can create counterparty credit risk, model risk, rating agency risk, and settlement risk. For the credit derivatives market to continue its rapid growth, market participants must find ways to meet these challenges.

Moderator
Frederic S. Mishkin, Member, Board of Governors of the Federal Reserve System, Washington, D.C.

Presenter
Michael S. Gibson, Assistant Director, Division of Research and Statistics, Board of Governors of the Federal Reserve System, Washington, D.C.
Presentation pdf document

Discussants
David K.A. Mordecai, President and Founder, Risk Economics Limited Inc., New York
Presentation pdf document
John G. Macfarlane III, Chief Operating Officer, Tudor Investment Corporation, Greenwich, Connecticut

Introduction of keynote speaker
Dennis P. Lockhart, President and Chief Executive Officer, Federal Reserve Bank of Atlanta

Keynote speaker

Liquidity Risk and the Global Economy off-site image
Timothy F. Geithner, President and Chief Executive Officer, Federal Reserve Bank of New York

Wednesday, May 16

Session III: "Credit Derivatives, Macro Risks, and Systemic Risks" pdf document
This paper explores some bigger-picture risks associated with credit derivatives. The author examines the well-documented macro drivers of credit generally and enumerates frequently cited concerns with credit derivatives: the exceedingly large notional trade in credit default swaps relative to outstanding debt, the increasing involvement of hedge funds in these products, and operational concerns that have surfaced in the past year. The paper then considers the possibilities of associated systemic risk, looking at the issues of modeling and proper valuation of these new and sometimes complex credit derivative instruments. Despite their inherent risks, credit derivatives provide practical and beneficial uses for generating income and distributing credit risk among a broader institutional base. Evolving market practices and safeguards should help establish a more efficient, transparent marketplace. Whether credit risk is best allocated outside of the traditional financial intermediaries remains an open question.

Moderator
Charles I. Plosser, President, Federal Reserve Bank of Philadelphia

Presenter
Timothy M. Weithers, Faculty, Graduate Program on Financial Mathematics, University of Chicago
Presentation pdf document

Discussants
Richard Berner, Managing Director and Chief U.S. Economist, Morgan Stanley, New York
Presentation pdf document
Nigel Jenkinson, Executive Director, Financial Stability, Bank of England, London
Presentation pdf document

Session IV: "Public Policy Issues"
This panel will integrate the perspectives of banks, hedge funds, corporations, and supervisors of financial institutions and markets on credit derivatives with the broader financial stability views of central banks and government agencies.

Moderator
Edward J. Kane, James F. Cleary Professor of Finance, Boston College
Presentation pdf document

Panel members
E. Gerald Corrigan, Managing Director, Goldman Sachs, New York
Thomas F. Huertas, Director, Wholesale Firms Division and Banking Sector Leader, Financial Services Authority, London
Donald L. Kohn, Vice Chairman, Board of Governors of the Federal Reserve System, Washington, D.C.

Peter Praet, Executive Director, National Bank of Belgium, Brussels