What Are the Main Arguments for and against the Regulation of Naked CDS?

Arguments for regulating or banning naked CDS center on systemic risk. Proponents of regulation argue that these instruments encourage excessive speculation, can be used to manipulate markets, and create a web of interconnected liabilities that can destabilize the financial system, as seen in 2008.

Arguments against regulation state that naked CDS provide essential market liquidity, improve price discovery of credit risk, and allow for the efficient transfer of risk. Opponents of a ban claim it would make hedging more expensive and the market less efficient.