Most institutional investors are concerned about counterparty risk in credit default swaps, which may represent a serious threat to global financial markets, according to a Greenwich Associates survey.
Among the U.S. institutions surveyed, nearly 85% considered CDS counterparty risk as a serious threat to global markets, while in Europe, 55% described it as a significant danger. More than 90% of hedge fund managers who responded said counterparty risk in CDS is a significant threat. Such concern has led institutional investors, mostly those active in fixed income, to cut back on their use of CDS.
Most institutions support the creation of central clearing for CDS.
The survey is based on interviews with 146 institutional investors, including 32 hedge funds, in North America and Europe following the mid-March collapse of Bear Stearns Cos. Inc. It focused on how counterparty risk fears influenced investment and trading decisions.