1. Europe’s Green Transition Projects Remain Under-financed
“The funding gap for environmental projects in Europe has been hard to fill, despite abundant private liquidity. The nature of private investment is to focus on financial risks and returns and revenue streams.”
Greg Ford, Finance Watch
2. Private Investors Reluctant to Commit in Green Projects
In this tough economic environment Renewable Energy/High Risk or other Green Projects will regrettably remain unfunded, as Private Investors have no tools to utilize risk anchoring trough Insurers or Financial Institutions.
3. Governments and IFIs Unable to Ensure Adequate De-risking
3.1 Deficiencies of Current De-risking Tools
3.2 CDS – Broken Tool
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3.3 After Pittsburgh Reform
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4. Why Now?
4.1 Climate Change Emergency UNEP
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4.2 Green Financing Gap – Green Bonds
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Old but Gold
Summary: Following a number of unintended consequences by the Pittsburgh Reform of financial derivatives (2009-2016) the CDS market has collapsed as trust in contract execution has evaporated.
Credit default swaps (CDS) are a type of insurance against default risk by a particular government or private entity. The entity is referred to as a “reference entity” and the default as a “credit event”. It is a contract between two parties, a ” protection buyer” and a “protection seller”. Under the contract, the protection buyer is compensated for any loss emanating from a credit event in a reference instrument. In return, the protection buyer makes periodic payments to the protection seller.
After the Financial Crisis of 2007-8 the G-20 governments undertook a major regulatory reshuffle of the derivative markets. One of the modifications introduced was to mandate loss sharing between derivative holders and financial institutions in case of a systemic event.
This was introduced in the EU by Directive 2014/59/EU art.44, 49 and related (effective since 2016) and in the US by the Dodd-Frank Act Section 165(d) and related (effective since 2014). All other G-20 governments introduced similar rules between 2012 and 2016[1].
Moving derivative holders from first to fifth place in a resolution has created a climate of uncertainty that the obligations taken by financial institutions to pay defaulted credit will be met, as credit events are most concentrated during systemic events and its financial turbulence.
[1] http://www.fsb.org/2016/08/otc-derivatives-market-reforms-eleventh-progress-report-on-implementation/
The current model of the CDS contract is based on extremely low reserves (typically less than 0.1%) that are syndicated in collateral pools that are posted in a syndicated manner. This is what we aim to change and individualize the posted collateral by the protection seller…. Read more
