Ever since Warren Buffett denounced derivatives as weapons of mass destruction in 2003, debate has raged between those who view these instruments as early-warning signals that protect investors and those who believe derivatives such as credit default swaps (CDS) destroy value and trigger bankruptcies.
In recent months, the Commodities Future Trading Commission (CFTC) has led the charge to bring new discipline to the CDS market with the aim of helping prevent future blow-ups of the likes of AIG or Lehman Brothers. CFTC commissioner Gary Gensler said in a speech this March that he was looking at revamping bankruptcy laws - an as-yet uncharted territory for derivatives reform. Ideas include requiring CDS-protected creditors of bankrupt companies to disclose their positions or to "specifically authorise bankruptcy judges to restrict or limit the participation of 'empty creditors' in bankruptcy proceedings".