Why aren CDS traded on an exchange?
CDS and other swap contracts are negotiated between two counterparties who are able to custom tailor the terms of the bilateral contracts in ways that suit them. Exchanges generally trade standardized contracts. Requiring CDS to trade on exchanges would force swap participants to give up the benefit of the custom tailoring that allows more precise risk management by companies, financial institutions, and governments. All of those entities are free to choose to manage their risks using exchange traded contracts, and sometimes do. Ensuring that more ways to manage risk are available achieves a desirable phenomenon that economists call “market completion.” By definition, a swap must be bilaterally negotiated, which is to say, not traded on an exchange. Bilaterally negotiated derivatives exist because no exchange-traded contract can replace a custom tailored, privately negotiated agreement like a credit default swap. Trying to force bilateral participants to trade on an exchange would be a
