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.