Transparency… more transparency…
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…
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Dealers and traders of over-the-counter derivatives are facing the threat of increased regulation after a stream of big bankruptcies and rescues dented confidence in the notoriously opaque markets.
http://www.efinancialnews.com/usedition/content/2452076235/24166/DAE98NDA0NTg0OjM2MjEzNzoxODk0Mw%3D%3D
Senior US Lawmaker Vows to Regulate CDS Market
The chairman of the House Financial Services Committee said Monday he would seek to regulate the fast-growing $55 trillion credit default swaps market, which has been blamed for exacerbating the financial meltdown.
By Reuters
October 14, 2008
WASHINGTON - The head of a U.S. congressional finance panel said Monday he would seek to regulate the fast-growing $55 trillion credit default swaps market, which has been blamed for exacerbating the financial meltdown.
Rep. Barney Frank, a Massachusetts Democrat, said regulation is needed to stem the financial crisis that has rocked Wall Street and shaken investor confidence.
“Failure to regulate the economy appropriately is what led to this mess,” Frank, the chairman of the House Financial Services Committee, told a Capitol Hill news conference.
The committee, which has oversight of the Federal Reserve, Treasury Department and Securities and Exchange Commission, plans to hold hearings on Oct. 21.
Frank said he would seek “sensible” regulation of the credit default swap (CDS) market when the new Congress meets in 2009.
“The turmoil in the market has given us a little bit of a breathing space,” he said. “They have screwed up so badly that they can’t screw up again for a while. Before they gain the ability to screw up, we have to put the (regulations) in place.”
CDS are used to protect or insure against the risk that a borrower will default on debt, or to speculate on a borrower’s credit quality.
Used by banks, brokerages, insurance companies and others, the swaps have been criticized for posing systemic risks because the opaque market makes it impossible to know the size of a counterparty’s exposures and where they are distributed.
Calls for regulation and a central CDS clearinghouse gathered steam after Lehman Brothers Holdings Inc collapsed and U.S. authorities were forced to rescue insurer American International Group with an initial $85 billion loan one month ago, followed by another of $38 billion last week.
It remains unclear which federal regulator might be tapped to police the CDS market, but both SEC Chairman Christopher Cox and a commissioner with the Commodity Futures Trading Commission, Bart Chilton, have called for regulation.
The U.S. House and Senate agriculture committees, which oversee the CFTC, were set to hold hearings this week on the role of credit derivatives in the U.S. economy.
Talk of reforming financial regulation has intensified amid a frozen credit market and worry that more financial institutions teeter on the edge of bankruptcy.
Democratic leaders in the House of Representatives pushed on Monday for a second economic stimulus package and greater regulation of the financial markets.
Former SEC Chairman Arthur Levitt, who led the agency during the Clinton administration, is among a group advising the Democratic leaders.
“There are all kinds of signals that have been sent that this is not an investor-friendly environment,” Levitt told Reuters after a news conference to announce the Democrats’ new economic stimulus package.
“Investors don’t have access to the (corporate) proxy, hedge funds are not inspected by the SEC, we don’t have investors with a non-binding vote on compensation,” he said.
http://wallstreetandtech.com/regulatory-compliance/showArticle.jhtml?articleID=211200299&cid=RSSfeed_WST_All
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