CDS spat, CME’s land grab and Mifid problems

The week on, May 5-11, 2018

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CFTC probed CDS market under last enforcement head

Goelman compares manufactured payouts to match-fixing, and says CFTC has jurisdiction to bring case

CME has chance to rule US rates after Nex deal

Market expects exchange to unite bond, repo, futures and swaps clearing – eroding grip of banks and DTCC

Europe struggles to get a grip on derivatives transparency

Mifid reporting has fallen short of US swaps data, but national regulators are partly to blame


COMMENTARY: Wetting their beaks

It’s never a good sign when you end up on late-night TV being compared to a Robert de Niro character, or being likened to scoundrels who manipulate the outcomes of sporting events – both of which have happened to Blackstone’s GSO Capital Management.

GSO’s fondness for making money by buying credit default swaps (CDS) and then manufacturing a default on the underlying debt was likened by the Daily Show’s Jon Stewart in 2013 to the ‘bust-out’ scam favoured by Jimmy Conway and Henry Hill in Goodfellas.

In 2013, GSO agreed to fund Spanish gaming company Codere in exchange for Codere engineering a default on certain debts by delaying a coupon payment by two days. In December 2017, it did something similar with US builder Hovnanian, revisiting the deal in April this year to increase its profits by encouraging the builder to swap much of its existing debt into long-dated, low-paying debt, which would shift the results of the settlement auction in GSO’s favour.

It’s not alone in this kind of activity, either: US broadcaster iHeart engineered a technical default in January 2017 to avoid triggering further liens.

But it looks like GSO’s revisiting of the Hovnanian deal was egregious enough to provoke a reaction. The International Swaps and Derivatives Association has launched a consultation on GSO-type “trigger-to-finance” deals, and the Commodity Futures Trading Commission’s former head of enforcement, Aitan Goelman, now backs the regulator’s latest attempts to clamp down on trigger-to-finance, which he likens to match-fixing in sports.

There’s a question mark over whether GSO’s behaviour actually contravenes the letter of the law. It contravenes its spirit, no doubt, but then so does much of the CDS market – a product originally intended as default insurance for creditors actually allows uninvolved parties to bet on creditworthiness, or (notoriously) to construct huge volumes of synthetic derivatives.

Goelman admits one of the problems with a prosecution might be that GSO made no effort to conceal what it was doing. In a remark that could sum up much of financial crime, he says: “If it’s open and brazen, then you don’t have that consciousness of guilt. If someone is hiding something or forging documents, that’s great evidence of a fraudulent state of mind. We don’t have that here.”

It is now up to the CFTC and other regulators to decide if they are able to prevent the practice. Goelman notes the Dodd-Frank Act (while it lasts) removes the need for a prosecutor to show intent to manipulate markets, which should make life easier – regulating financial markets using an intent-based approach is never easy, as the attempts to implement the Volcker rule have shown.

Isda’s attempts to fix the problem by patching CDS documentation may help, but even Isda’s supporters warn the fix could be temporary at best – and will inevitably cause some disruption to the CDS market as a whole.



Wells Fargo experienced the biggest operational risk loss in April, continuing a run of significant fines that have dogged the bank since 2016. The Consumer Financial Protection Bureau and the Office of the Comptroller of the Currency fined Wells Fargo a total of $1 billion for failing to follow correct procedure for mortgage applications, and inappropriately adding insurance cover for borrowers who had vehicle loans with the bank.



“There is a general increase in the amount and the quality of senior security management across different sectors. You are still going to see a steady pipeline of DoD, intelligence community folks going into the financial and private sector because it has worked, but it is not going to be as heavily reliant as it was in the past” – Mark Morrison, Options Clearing Corporation

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