Credit Default Swaps and the Empty Creditor Hypothesis — If it Ain’t Broke, Don’t Fix it

An empty creditor is a creditor who, through the use of derivatives, especially credit default swaps (CDSs), takes a position where she retains the legal rights of a creditor but has little or no economic exposure to a borrower. Thus far, the debate on empty creditors has focused mainly on how the law should react to the perceived problem of empty creditors. The debate also covers the prominent argument that empty creditors violate the underlying corporate law assumption that creditors and shareholders hold their legal rights in proportion to their economic exposure to a company. This article argues that the current debate is fundamentally misguided — that empty creditors are in fact not a problem. The article presents a theoretical argument suggesting that empty creditors are unlikely to be a widespread phenomenon. Further, the article argues that the law has never made the assumption that legal rights are held in proportion to economic exposure; in fact, taking economic exposure into account when allocating legal rights to investors is contrary to fundamental principles of corporate law