Forum codifies Chinese Walls in credit trading

The Joint Market Practices Forum - an ad hoc group of four market trade associations – has produced a set of principles and recommendations tackling the contentious issue of Chinese Walls between credit trading and lending functions.

The guidelines are intended for use by “financial institutions that use securities and securities-based swaps to manage and hedge their credit portfolios”, according to the forum.

The point of focus is so-called ‘material non-public information’ - information that is not available to the public and that can be considered important in making investment decisions. Some credit default protection sellers have long been suspicious that some firms’ derivatives desks may potentially have inappropriate access to privileged information about a reference entity’s financial health, via colleagues on the lending side of the business. For example, without an airtight Chinese Wall between trading and lending, a firm that could realise large profits if protection it bought is triggered, could precipitate this outcome via its lending relationship with the reference entity.

The forum said its recommendations should help ensure that material non-public information obtained by financial services firms via lending or other relationships with a company is not inappropriately shared with, or used by, other business units or personnel within the same institution that transact in the securities and credit derivatives markets.

The statement of principles is the result of discussions between forum members since the end of 2002. The forum consists of the Bond Market Association, the International Association of Credit Portfolio Managers, the International Swaps and Derivatives Association, and the Loan Syndications and Trading Association.