Counterparty credit risk influences trading choices in credit default swaps market.
Market participants in the credit default swap market consider counterparty credit risk when choosing who to trade with. While this risk only slightly affects the pricing of contracts, it greatly influences the choice of counterparties. Traders are less likely to engage with counterparties whose credit risk is closely tied to the reference entities or who have low credit quality. This suggests that credit rationing can occur more frequently than previously thought.