Financial derivatives have been immensely important to the financial landscape over the past 10 years. They have enabled substantial increases in capital, hedging against currency and interest rate fluctuations, and insurance against potential risks.
We are all painfully aware, however, of some of the unintended consequences of the worldwide derivatives market, including its leading role in the recent economic collapse. Over the past 18 months, financial derivatives have had unintended consequences in the world of financially-distressed companies, in particular credit default swaps (CDS) have adversely affected public bond exchange offers and pre-packaged Chapter 11 plans of reorganisation. In many cases, the existence of CDS has disincentivised active participation in restructuring discussions, having the potential to complicate and impede restructuring efforts of a company in financial distress.