Credit Default Swaps in Bankruptcy Proceedings under US Law

The presence of undisclosed CDS positions in bankruptcy proceedings has been thoroughly examined in previous research. Various economic scholars argued that the creation of silent short positions in reorganizations can impair the successful confirmation of a reorganization plan. US legislators responded with the 2011 amendments to Bankruptcy Rule 2019 imposing an obligation on groups or committees of creditors in Chapter 11 cases to disclose any short position, including CDS positions. The question that remains open is whether the limited disclosure requirement embedded in Bankruptcy Rule 2019 suffices to safeguard the fair and equitable distribution of a debtor’s assets pursuant to the principles and provisions of bankruptcy law. The study therefore examines the legal inconsistencies that can occur from individual, undisclosed CDS positions, particularly with regard to the pari passu principle and the Chapter 11 provisions regarding the legitimate acceptance and confirmation of a reorganization plan. Conclusively, the study reviews whether such potential inconsistencies are imminent enough to justify the introduction of an expanded disclosure obligation.