Citibank responds, sues for breach of contract in credit default swap case

By Danielle Reed, New York

Citibank filed a response 23 April and countersued for breach of contract in its ongoing court battle with a hedge fund over a credit default swap.

Whatever the outcome of this particular case, the mere fact that such issues are being litigated highlights a source of concern to longtime derivatives market participants: Namely, the growing participation of hedge funds in the CDS market. “One of the things that has been of great concern to me for a long time is [the] many new entrants to the credit default swap market, especially hedge funds who have not cut their teeth on less complex over-the-counter derivatives...before taking on large sized positions in CDS,” said Leslie Rahl, founder and president of Capital Market Risk Advisors. A pioneer in the derivatives market, Rahl said she is “pro-derivatives” but fears that “some of the newer players don’t fully understand the differences between a liquid, transparent securities market and the world of over-the-counter derivatives.”

April 28, 2008