Credit Derivatives and Risk Management : Corporate Governance in the Sarbanes-Oxley World

Credit derivatives were at the centre of the recent meltdowns in the financial sector. The article analyzes credit derivatives and their risks from the perspective of corporate governance. The present model of governance is based on management by executives, oversight by the board of directors and audit by independent professionals. The article identifies significant gaps in this structure of governance, in particular the level of involvement of the board in performing its function of monitoring business and risk, and the scope of independent audit. The article proposes regulatory prescription of 'minimum board responsibilities' and mandatory risk assessment