Short-selling and CDS regulation in EU: Less to nakedness than meets the eye, funds and firms argue
By Peter Elstob
LONDON/NEW YORK, March 5 (Thomson Reuters Accelus) - Regulators and market participants continue to differ fundamentally over when a credit default swap should be deemed to be uncovered, or ‘naked’, and when investors are using CDS as a legitimate hedge. If a sovereign CDS can be demonstrated to be hedging counterparty or systemic risk, it can be exempted from the provisions of the proposed European short-selling regulation, which is aimed at abusive use of sovereign CDS by financial institutions to bet against countries’ debt.
Trade bodies argue that regulators should recognize various forms of ‘proxy’ hedging, including buying CDS for the debt of countries other than the one where the institution’s exposure lies — so-called ‘cross-border’ hedging’ — and ‘tail-risk’ hedges that may or may not turn out to have been necessary over a given period. They believe that the short-selling regulation (level 1) does not ban these strategies, and they should therefore be permitted (and so qualify for exemptions) in the detailed rules (level 2) that the European Securities and Markets Authority (ESMA) is still drawing up. (more…)
Cost-benefit lawsuits snarl Dodd-Frank implementation
By Nick Paraskeva
NEW YORK/WASHINGTON, (Thomson Reuters Accelus) – A financial industry lawsuit seeking to block new U.S. rules on commodity position limits on the grounds that they lack an adequate cost-benefit analysis could cause regulators to slow their implementation of the Dodd-Frank financial regulatory overhaul and be an indicator of more such challenges. Meanwhile, the Obama administration is saying it will resist efforts to block the law. (more…)
In context of SIFMA’s ability to delay and derail necessary regulation, it is informative to read The Bond Buyer article on “SIFMA: A Lobbying Powerhouse.” (see http://www.bondbuyer.com/issues/120_235/ sifma-powerful-lobbying-group-1033980-1. html)
All this suggests that it is high time the actions of SIFMA and Ira Hammerman in particular be subjected to intense scrutiny.
Links to CDS measures growing common in bank credit deals (Westlaw Business)
By Erik Krusch
Jan. 10 (Westlaw Business) – Credit terms are loosening, but lenders are still after their proverbial pound of flesh. Consider AIG and AT&T’s recent credit agreements, which link each loan’s interest rate to the corporations’ credit default swaps (CDS). Lenders are also insulating themselves from risk with London Interbank Offered Rate (LIBOR) floors, such as the one undergirding healthcare technology company MedAssets’ recent term loan. In a similar vein, bankers installed an original issue discount (OID) in construction materials maker Armstrong World Industries’ recent term loan. Lenders are doing their due diligence and weighing risks in order to concoct the right mix of interest rate terms in hopes of protecting their capital going forward. (more…)
Clearly the maxim that common sense is uncommon remains true as does the proposition that risk in its various manifestations is discounted by the “it won’t happen to me” sense of expectation. Even if all actors do not have agreed upon objective probability distributions for rare events it does not mean that we should either understate or ignore such uncertainty. The CFOs and treasurers signing off on these covenants are taking a big gamble.
LCH highlights challenge in derivatives regulation
By Huw Jones
LONDON, May 18 (Reuters) – LCH.Clearnet moved to reassure markets on Tuesday that its capital base was adequate despite a ratings downgrade at a time when regulators are finalising laws to force banks to clear vast numbers of derivatives.
Standard & Poor’s placed LCH.Clearnet’s rating on “negative credit watch” last week after one of its biggest customers, the transatlantic exchange NYSE Euronext said it would stop using the Anglo-French clearer from late 2012.
“The clearing activity itself is not dependent upon the creditworthiness of the clearing house,” LCH.Clearnet Chief Executive Roger Liddell told an industry conference.
LCH.Clearnet has more than 3 billion euros of capital and this is dwarfed “into almost insignificance” by the 55 billion euros put up the company’s users, Liddell said.
“So the risk of the system is effectively underwritten by all of its participants who have a lot of their capital on the line,” Liddell said.
The downgrade comes as the European Union and the United States are thrashing out new rules that will force banks to centrally clear as much of the $615 trillion off-exchange derivatives market as possible with operators like LCH.Clearnet.
SNAP ANALYSIS – Goldman charges give lift to Lincoln US swaps bill
By Roberta Rampton
WASHINGTON, April 16 (Reuters) – Bombshell fraud charges against Goldman Sachs, one of the largest swaps dealers on Wall Street, give new impetus to a tough derivatives reform bill proposed by Senate Agriculture Chairman Blanche Lincoln on Friday.
The bill must be meshed with other proposals that are part of Congressional efforts to reform the financial regulatory system. But Lincoln is now placed to play a leading role in the debate on how the final package will impact on the $450 trillion over-the-counter swaps market.
With one eye to the November mid-term elections, the bill could find support from lawmakers keen to take a stand against excess on Wall Street. But it is unclear whether the White House would support going this far.
Lincoln outlined the key points of her bill earlier this week, surprising derivatives players closely watching for the detailed language in the bill to gauge its impact and chances for success.
“This is another example of how risky Wall Street behavior puts our nation’s financial system in peril and further illustrates the need for the strong reform that my legislation provides,” Lincoln said in a statement provided to Reuters.
* Unlike bills from the Senate Banking Committee and the House of Representatives, Lincoln’s bill would require banks to spin off swaps desks if they are protected by federal deposit insurance or access the Federal Reserve discount window.
Japan’s FSA to regulate CDS clearinghouse participation-Nikkei
April 13 (Reuters) – Japan’s Financial Services Agency (FSA) plans to introduce a capital requirement for credit default swap clearinghouses and an accreditation system for their major shareholders, the Nikkei business daily reported. (more…)
U.S. trial over credit-default-swaps tests laws on insider trading
By Grant McCool
NEW YORK, April 7 (Reuters) – Were conversations between a bond salesman and a trader over credit default swaps a case of illegal insider trading? Or were they just part of the sharing of information that typically occurs in negotiations over high-yield bonds?
That depended on who was arguing in court on Wednesday as a trial began of Deutsche Bank AG bond salesman John-Paul Rorech and former Millennium Partners hedge fund portfolio manager Renato Negrin on civil insider trading charges.
The trial is a signature case for the U.S. Securities and Exchange Commission, its first enforcement involving credit default swaps, financial instruments used to insure against the default of debt issuers. Legal experts consider the case a test of whether regulators can make insider trading cases in the unregulated market for the swaps.
Lawyers for the defendants said in their opening arguments in Manhattan federal court that the SEC does not have the authority to regulate the CDS at issue because they are not securities-based swap agreements under securities laws.
CDS have been the focus of investigations in the financial crisis after giant insurer American International Group ran into trouble with them and was bailed out by the U.S. government. At least two U.S. prosecutors attended parts of Wednesday’s opening arguments as observers.
In May 2009 the SEC charged Rorech and Negrin over a 2006 transaction for Dutch media conglomerate VNU NV. Neither Deutsche Bank nor Millennium were accused of any wrongdoing. VNU was taken private in 2006.
FACTBOX – How does the EU plan to shake up financial services?
BRUSSELS, April 7 (Reuters) – The European Union (EU) is embarking on an overhaul of financial services that politicians hope will send bankers back to their roots of no-frills lending to households and business.
Michel Barnier is the EU commissioner in charge of the shake up on regulations ranging from curbs on banker pay to a clampdown on speculators betting on government debt.
Here is a guide to the overhaul:
* One of Barnier’s priorities is writing a rule book for trading derivatives, a financial instrument whose value is linked to an asset such as a government bond or currency.
Pushed to the top of the agenda after politicians blamed speculators for worsening Greece’s borrowing problems, the European Commission will in June propose broad controls on market betting.
As part of a drive to force more transparency in the $600 trillion off-exchange derivatives market, Barnier will demand that traders either record their positions, or buy and sell through a central counterparty or exchange.
In October, the Commission will propose controls for short selling and credit default swaps in government debt — a form of insurance.
SCENARIOS-Three routes to swaps reform in U.S. Congress
WASHINGTON, March 16 (Reuters) – The path to government regulation of the $450 trillion market in over-the-counter derivatives must wind through the U.S. Senate Agriculture Committee, which oversees futures markets.
The journey began in the House of Representatives in December with the passage of a bill that would bring OTC derivatives under government regulation for the first time.
The Senate Banking Committee is also involved. A bill unveiled on Monday by its chairman calls for new rules for the market, which is dominated by a handful of Wall Street firms, including Goldman Sachs and JPMorgan Chase.
The Obama administration and most congressional Democrats favor an OTC derivatives crackdown, with many Republicans on board as well. But Wall Street lobbyists keen to protect the substantial profits produced by derivatives trading are pushing to write loopholes and exemptions into the new regulations.
There is wide consensus among lawmakers to require mandatory clearing and exchange trading of standardized derivatives. Trading of customized swaps would be reported, with the expectation of higher margin and capital requirements.
The details of the legislation will guide how regulators wield their new power over the market.
With only a few weeks of actual legislating time remaining before lawmakers shift their focus to the November elections, here are three potential routes for reform.
EU’s Barnier pledges to tackle speculators
By John O’Donnell
BRUSSELS, March 17 (Reuters) – The European Commission plans to propose controls on certain government debt derivatives as soon as June in an effort to crack down on speculation blamed for aggravating Greece’s borrowing problems.
Curbing speculation by hedge funds in credit default swaps, a form of debt insurance, is high on the EU’s political agenda as finance ministers consider a possible bailout of Greece, the euro zone’s most troubled economy.
On Wednesday, Michel Barnier, the European commissioner in charge of financial market regulation, said he would propose rules to control naked selling of credit default swaps — the sale of the insurance contracts to buyers who do not own the debt — as soon as June.
Speaking to members of the European Parliament who will vote the proposals into law, former French foreign minister Barnier said he would be proposing laws on naked selling and credit default swaps.
France and Germany in particular have criticised naked selling of CDS, while the United States and Britain are among countries that oppose an outright ban on the trade although they favour regulation of derivatives’ markets generally.
Investors who own government debt buy CDS when they want to hedge against the risk of a government defaulting on its debts. The value of a CDS goes up and down depending on the likelihood of default.
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