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The prohibition against insider trading is growing increasingly out-of-date in markets where credit derivatives like credit default swaps are traded, says a 91�Ʋ��� Law School professor.

“Lenders use credit default swaps to trade the risk of the loans they make,” says , assistant professor of law. “And, when they engage in such trading, they are usually privy to vast reserves of confidential information on their borrowers.”

“[rquote]Credit default swaps appear to subvert insider trading laws by their very design.”[/rquote]

Insider trading laws prohibit trading based on information procured through an unfair advantage by those in a privileged relationship to a company. Following the financial crisis of 2007-08, such laws have been used in a series of important cases to sanction Wall Street and check market abuse.

“A series of high-profile actions for insider trading offenses have demonstrated the bite as well as the bark of existing rules,” Yadav writes in .

“Recent legislation has expanded the reach of the insider trading prohibition to explicitly include the credit derivatives market.”

Some finance theorists have already noted that credit derivatives markets exhibit tell-tale signs of insider trading. Credit default swap markets often anticipate market events months and sometimes even years before they happen, particularly with respect to “negative” events, such as a credit downgrade or bankruptcy – in other words, events that lenders are most concerned about.

“Old laws and new credit default swap markets appear to exist in a state of serious tension,” Yadav says. “Either this thriving market is operating outside or at the margins of existing law – or the law itself has not adapted to the existence of these markets.”

Yadav suggests taking another look at the prohibition against insider trading, and to explore whether there is a consistent standard that can work for both equity and derivatives markets.