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<p>[QUOTE=&quot;InfleXion, post: 1256568, member: 29012&quot;]I find this all relatively confusing as I am not in finance as a profession, but this Wikipedia entry helped me understand a little bit better.&nbsp; </p><p><br /></p><p><a href="http://en.wikipedia.org/wiki/Tranches" target="_blank" class="externalLink ProxyLink" data-proxy-href="http://en.wikipedia.org/wiki/Tranches" rel="nofollow">http://en.wikipedia.org/wiki/Tranches</a>&nbsp; </p><p><br /></p><p>&nbsp; </p><p><br /></p><p>I have seen the term ring-fencing before when talking about derivatives, but I&#039;m not sure entirely what it means. I think the credit default swap piece is key here, as it is a form of insurance or protection against default.&nbsp; </p><p><br /></p><p>As per <a href="http://en.wikipedia.org/wiki/Credit_default_swap" target="_blank" class="externalLink ProxyLink" data-proxy-href="http://en.wikipedia.org/wiki/Credit_default_swap" rel="nofollow">http://en.wikipedia.org/wiki/Credit_default_swap</a>&nbsp; </p><p><br /></p><p>&nbsp;</p><p><br /></p><p>I find this last quote a little bit contradictory though. First it says a CDS can be held by someone with no insurable interest in the loan itself, which seems to imply an outside investor is on the hook, but then it goes to say that the buyer (investor) receives a payoff from the seller (bank) if the contract defaults. </p><p><br /></p><p>Also per <a href="http://en.wikipedia.org/wiki/Credit_event" target="_blank" class="externalLink ProxyLink" data-proxy-href="http://en.wikipedia.org/wiki/Credit_event" rel="nofollow">http://en.wikipedia.org/wiki/Credit_event</a> </p><p><br /></p><p>&nbsp;</p><p><br /></p><p>In this case it seems to be the latter example which would indicate that at minimum the impact here is an increase in the derivatives market. This may explain why it&#039;s so large to begin with, but does seem to support that the bank itself is not on the hook.[/QUOTE]</p><p><br /></p>

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