SEC Chairman Cox gave opening remarks for the 21st Century Disclosure Initiative Roundtable and talked about transparency for the CDS market … his statement was the most serious effort to rein in the markets spiralling out of control that I have heard…
~~~~ “The reason for this aggressive enforcement investigation into credit default swaps is the significant opportunity that exists for manipulation in the $58 trillion credit default swaps market. It is a market that is completely lacking in transparency, and virtually unregulated.
The regulatory black hole for credit default swaps is one of the most significant issues we are confronting in the current credit crisis, and it requires immediate legislative action.
The over-the-counter market in credit default swaps has experienced explosive growth in recent years. One reason is that the total amount of credit default swaps outstanding far exceeds the total value of what the swaps are meant to insure. So when entire asset classes fall in value, the exponentially larger losses on credit default swaps can work to amplify the risk to the financial system.
To put into context this $58 trillion of value that credit default swaps insure: $58 trillion is more than the gross domestic product of every country on earth, combined.
The market for CDS is barely 10 years old. It has doubled in size since just two years ago. It has grown between the gaps and seams of the current regulatory system, where neither the Commission nor any other government agency can reach it. No one has regulatory authority over credit default swaps — not even to require basic reporting or disclosure.
The over-the-counter credit default swaps market has drawn the world’s major financial institutions and others into a tangled web of interconnections where the failure of any one institution might jeopardize the entire financial system. This is an unacceptable situation for a free market economy.
These complex interconnections pose risk to the financial system precisely because of the complete lack of information about who is exposed to whom. They have created a situation that is ripe not only for rumor and misinformation, but potentially fraud. This is of even greater concern because the over-the-counter market for credit default swaps has given rise to a new phenomenon: the rise or fall of prices in the swaps market has begun to serve as a signal to the markets about the pricing of the underlying debt and equity securities.
In recent days we have witnessed how the rise and fall of the costs of credit default swaps on the debt of a financial institution appears to correlate with changes in its stock price. Manipulation in this completely unregulated and hidden space can drive prices in the regulated market for securities. That is why I believe it is important for Congress to act now to provide for regulatory oversight of the credit default swaps market.
Credit default swaps serve important purposes. They can’t be trivialized as inherently good or evil. They are simply contracts that have grown in a very short span of time to such size that they matter enormously to the overall economy. But in today’s market conditions, where uncertainty is the enemy, their invisibility undermines investor confidence. Transparency is a powerful antidote for what ails our capital markets. When investors have clear and accurate information, and when they can make informed decisions about where to put their resources, money and credit will begin to flow again. That’s why what all of you are working on here today is so important.
But today, the Commission’s only authority with respect to over-the-counter credit default swaps is limited to enforcing the antifraud laws, such as those against insider trading. In fact, federal securities law specifically prohibits the Commission from regulation of credit default swaps — even as a preventative measure against fraud. That state of affairs simply cannot remain. We have seen the costs of other regulatory gaps in the last few months. There is no longer any excuse for failing to act.
Legislation is needed to require trade and position reporting by dealers in over-the-counter credit default swaps. Public reports of over-the-counter transactions would provide transparency and ensure better pricing….” ~~~~
I wish Chairman Cox, the other Commissioners and staff members of the SEC and other regulators the best of luck addressing this problem… it is central to restoring stability to the global financial system.
The Federal Reserve has attempted to rein in this market and had no success… it was exceptionally profitable for the dealers…
I imagine that pushing dealers (banks) to change while the global financial system is collapsing is a Herculean effort…
My thoughts are with all involved… have faith… it is the right time and the right purpose…