And in the event of default, investors are still exposed to the further risk that the recovery rate will be lower than expected. The management of default and recovery risks presents nothing fundamentally new to investors. Instruments like single-name CDS and credit derivative indexes simply replicate the sort of credit exposures that have always existed.
From the perspective of financial stability, I believe that the most important risk-management challenge in credit markets is the management of counterparty credit risk. I mentioned earlier that institutional investors, including hedge funds, are now more active in credit markets.