Credit derivative markets are largely unregulated, but calls are increasingly being made for
changes to this “hands off” stance, amidst concerns that they helped to fuel the current
financial crisis, or that they could be a cause of the next one. The purpose of this paper is to
address two basic questions: (i) do credit derivative markets increase systemic risk; and (ii)
should they be regulated more closely, and if so, how and to what extent? The paper begins
with a basic description of credit derivative markets and recent events, followed by an
assessment of their recent association with systemic risk. It then reviews and evaluates some
of the authorities’ proposed initiatives, and discusses some alternative directions that could
be taken.