Comment by: Anonymous. Posted 12 years ago [2011-10-31 21:28:17]

Perhaps this is an obvious rejoinder. Though it's reasonable to say that CDS should not trigger "in the context of a voluntary debt exchange", one must then drill down to define what situations are "voluntary" and which are coerced. Imagine the situation of Deutsche Bank with significant CDS to hedge Italian sovereign risk. How should a risk manager now view those positions? If you know your bank will be required (by politics and regulatory directive) to take future losses "voluntarily" on the cash bonds, why not unwind all the CDS now? Those CDS positions are not effective hedges.