
Regulation of CDS market ‘will be counterproductive’
Daily news headlines
WASHINGTON, DC – In a prepared statement to the Senate Banking Committee yesterday, the chairman of the US Securities and Exchange Commission (SEC), Christopher Cox, indicated the problems caused by the non-regulation of the $58 trillion credit default swaps market.
Cox said: “The $58 trillion notional market in credit default swaps … is regulated by no-one. Neither the SEC nor any regulator has authority over the CDS market, even to require minimal disclosure to the market.” He went on to compare CDS buyers with short sellers. “Economically, a CDS buyer is tantamount to a short seller of the bond underlying the CDS. Whereas a person who owns a bond profits when its issuer is in a position to repay the bond, a short seller profits when, among other things, the bond goes into default. Importantly, CDS buyers do not have to own the bond or other debt instruments upon which a CDS contract is based. This means CDS buyers can ‘naked short’ the debt of companies without restriction. This potential for unfettered naked shorting and the lack of regulation in this market are cause for great concern.”
As a result, Cox called on Congress to “provide in statute the authority to regulate these products to enhance investor protection, and ensure the operation of fair and orderly markets”.
Robert Claassen, a derivatives expert and partner at international law firm Paul Hastings, says: “I'm concerned that any reactive regulatory efforts would be counterproductive, and potentially drive the market offshore to London and Hong Kong. At the end of the day, the SEC does not currently have direct jurisdiction over the vast majority of CDS transactions, because they are not securities.”
He added: “Any effort for the SEC to limit the types of entities or regulatory status of entities entering into CDS transactions could be counterproductive or impose additional disclosure obligations on the trades themselves, and could serve to increase the cost of entering into these transactions.”
The fragmented financial regulation system in the US could also, Claassen warns, lead to turf wars in the effort to regulate CDS transaction. “The fear is that, with the rush to regulate, different parts of the CDS market will be under the jurisdiction of different regulators, resulting in a hodgepodge of regulation that could make it more difficult for these transactions to happen in the US, driving the market offshore.”
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Printing this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Copying this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email info@risk.net
More on Regulation
Europe’s lenders sail into uncharted waters of the banking book
Regulators are pushing banks to map their credit spread risk. Here be dragons?
SEC may lack legal clout to impose new dealer rule – Citadel
Adoption of quantitative dealer definition may require congressional changes to US Securities Exchange Act
US Basel endgame hits clearing with op risk capital charges
Dealers also fret about unlevel playing field compared with requirements in the EU
CFTC’s clearing house recovery rule splits industry
Some fear CCPs will fast-track recovery, others say any rule book will be ignored in emergency
EU banks ‘will play for time’ in stand-off over India’s CCPs
Lawyers say banks are unlikely to set up subsidiaries and will instead pin hopes on revised Emir fix
ECB mulls intervention on uneven banking book reporting
Inconsistency among EU banks on whether deposits and loans are in scope for credit spread risk
Iosco warns of leveraged loan ‘vulnerabilities’
As recovery rates plummet, report calls for clearer covenants and more transparency on addbacks
Narrow path to compromise on EU’s post-Brexit clearing rules
Lawmakers unlikely to support industry demand to delete Emir active accounts proposal altogether