Regulating credit default swaps

[sprstpd]

I basically know nothing about credit default swaps except for what was presented in this radio program:

http://www.thisamericanlife.org/Radio_Episode.aspx?episode=365

My question is, if the credit default swap market currently is exposed to huge counter-party risk, and if you somehow got these contracts to trade on a regulated exchange, how does this shift the counter-party risk at all? I mean, from what I am hearing, the risk to these companies who sold the credit default swap insurance could take down any institution or exchange (the amount of money involved is almost incomprehensible). How would an exchange eliminate this counter-party risk? Wouldn't the exchange have to have unlimited pockets in order to guarantee these contracts as good? Confused.

 

[AAA30]

Daily settlements and margin requirements like futures. I just hope they do not mix the clearing of futures with the CDS's and form so type of separate entity.

 

[nazzdack]

I believe the CDS's would have to be "standardized", not customized, just like futures contracts to give it a better chance of succeeding. We'll see.

 

[sprstpd]

Quote from AAA30:

Daily settlements and margin requirements like futures. I just hope they do not mix the clearing of futures with the CDS's and form so type of separate entity.

Then how do you start the exchange if it can be assumed that some of the counter-parties are already insolvent? Or are you saying that if these contracts can be put on margin, then some of the most devastated counter-parties may be able to hang on by a thread?