This is outstanding… determination … it is the best…
~~~~ “WASHINGTON/NEW YORK (Reuters) – U.S. securities regulators will help speed efforts to create a central counterparty for the $55 trillion credit default swap market by temporarily exempting exchanges, dealers and other applicants from lengthy registration requirements, according to a document obtained by Reuters on Tuesday.
Among those informed of the U.S. Securities and Exchange Commission’s plan were IntercontinentalExchange Inc, CME Group Inc, NYSE Euronext and Eurex, the SEC document said.
SEC staff want to promote the swift creation of one or more central counterparties for credit default swaps (CDS), which are used to insure against bond default risk.
A central counterparty would help standardize the criteria to evaluate risk exposure and free collateral. It would also give regulators and the public a glimpse into an opaque and complex part of the derivatives market, blamed for contributing to the financial crisis.
According to the SEC document, a central counterparty would be eligible for exemption from certain agency registration requirements if it meets certain conditions. Those conditions include giving the SEC access to conduct on-site inspections of the central counterparty’s books, records, facilities and systems….” ~~~~
3 Comments
Credit Swap Disclosure Obscures True Financial Risk (Update2)
By Shannon D. Harrington and Abigail Moses
Nov. 6 (Bloomberg) — The most comprehensive report on unregulated credit-default swaps didn’t disclose bets in the section of the more than $47 trillion market that helped destroy American International Group Inc., once the world’s biggest insurer.
A report by the Depository Trust and Clearing Corp. doesn’t include privately negotiated credit-default swaps that insurers such as AIG, MBIA Inc. and Ambac Financial Group Inc. sold to guarantee securities known as collateralized debt obligations. It includes only a “small fraction” of contracts linked to mortgage securities, according to Andrea Cicione at BNP Paribas SA in London.
New York-based DTCC’s data, released on its Web site Nov. 4, showed a total $33.6 trillion of transactions on governments, companies and asset-backed securities worldwide, based on gross numbers. While designed to ease concerns about the amount of risk banks and investors amassed on borrowers from companies to homeowners, the report may have missed as much as 40 percent of the trades outstanding in the market, Cicione said.
The data are “likely to underestimate the amount of net CDS exposure,” Cicione, who correctly forecast in January that the cost of protecting European companies from default would rise, said in an interview. “A broadening of the coverage to the entire market is what investors really need.”
`Increased Transparency’
DTCC released the data as dealers and investors in the market seek to counter criticism that the market has amplified the financial crisis. The Nov. 4 report showed, for example, that $15.4 trillion of contracts linked to individual companies, governments and other borrowers were created. After canceling out contracts that offset one another, though, sellers of that protection would have to pay $1.76 trillion if all underlying borrowers defaulted and debt holders recovered nothing.
The data is “definitely a welcome development,” Cicione said.
Trading of credit derivatives soared 100-fold the past decade as banks, hedge funds, insurance companies and other investors used the contracts to protect against losses or speculate on debt they didn’t own. The growth was driven partly by CDOs, securities that parcel bonds, loans and credit-default swaps, slicing them into varying layers of risk.
Banks worldwide have taken $693 billion in writedowns and losses on loans, CDOs and other investments since the start of 2007, according to data compiled by Bloomberg.
CDX Indexes
Investors hedging against losses on CDOs helped push the cost of default protection to a record last week. The benchmark Markit CDX North America Investment Grade Index, linked to the bonds of 125 companies in the U.S. and Canada, reached 240 basis points on Oct. 27. The index rose 5 basis points to 192 basis points as of 8:48 a.m. in New York, according to broker Phoenix Partners Group.
The Markit iTraxx Europe rose to as high as 195 basis points from as low as 20 in June 2007. It was quoted at 139.5 basis points today, according to JPMorgan Chase & Co. A basis point on a credit-default swap protecting $10 million of debt from default for five years costs $1,000 a year.
Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. An increase indicates deterioration in the perception of credit quality; a decline signals the opposite.
$440 Billion
AIG first disclosed to investors in August 2007 that it held more than $440 billion of credit-swap trades linked to CDOs. The New York-based company was brought to the edge of bankruptcy in September after the value of the transactions plunged. The insurer was forced to come up with more than $10 billion in collateral to back the contracts after its debt rankings were cut. It accepted an $85 billion government loan in exchange for ceding control to the U.S.
MBIA and Ambac, previously the world’s two biggest bond insurers, lost their top AAA ratings earlier this year because of potential losses on credit swaps sold to guarantee CDOs backed by home loans. Moody’s Investors Service cut New York-based Ambac’s bond insurance rating four levels yesterday to Baa1, three steps above junk, because of potential losses on the derivatives.
A market survey this year by the New York-based International Swaps and Derivatives Association, which includes credit swaps on CDOs and other contracts that may not be captured by DTCC’s Trade Information Warehouse, estimates more than $47 trillion in gross contracts are outstanding.
`Gaps’
The Federal Reserve Bank of New York, which urged dealers to curb risks and improve transparency in the credit swaps market over the past three years, said regulators will continue to push for more disclosure. Among the information the Fed wants to see are prices at which the derivatives trade, according to a New York Fed spokesman.
“There appear to be gaps,” said Henry Hu, a law professor at the University of Texas in Austin who has pressed for the creation of a data warehouse encompassing all privately negotiated derivative trades to offer a better understanding of their risks.
“Hopefully, regulators are getting more information,” he said.
Because the DTCC registry captures only commonly traded contracts that can be confirmed over electronic systems, not every swap trade is in the company’s report, spokeswoman Judy Inosanto said. Among those not included are credit-default swaps on CDOs, she said.
MBIA, the Armonk, New York-based insurer crippled by ratings downgrades earlier this year following losses from such contracts, has said it sold $126.3 billion in guarantees on slices of CDOs backed by corporate bonds, mortgages and other debt. Ambac sold $60.7 billion in guarantees on these so-called tranches, mostly through credit swaps, the company said.
CDO Losses
Insurers including AIG, MBIA and Ambac typically sold protection on the highest ranking slices of such deals, meaning they’d be required to make good on payments only after a substantial part of the underlying debt defaults.
The failures of Lehman Brothers Holdings Inc., Washington Mutual Inc. and three Icelandic banks that were widely held in CDOs linked to corporate debt caused no losses on tranches MBIA guaranteed, Mitchell Sonkin, the company’s head of insured portfolio management, said in a conference call yesterday.
New York-based Lehman and WaMu, based in Seattle, filed for bankruptcy. Iceland’s government took over its three biggest lenders last month after they were unable to raise short-term funding, triggering pay-outs on credit-default swaps.
Some investors holding the riskier slices of CDOs that weren’t guaranteed lost more than 90 percent because of the bank failures.
“The worry is that these bespoke tranches are being eaten away, and who knows if and when these losses will get realized,” Tim Backshall, chief strategist at Credit Derivatives Research LLC in Walnut Creek, California, wrote in a note to clients yesterday.
http://www.bloomberg.com/apps/news?pid=20601109&sid=aJzpw_m1iC4M&refer=home
UPDATE 3-EU executive wants CDS central clearing by year-end
Wed Nov 5, 2008 4:30pm EST
BRUSSELS, Nov 5 (Reuters) – Credit default swaps (CDS), a $55 trillion market that critics say exacerbated the credit crunch, should be centrally cleared in the European Union by the end of the year to cut risk, the bloc’s executive said on Wednesday.
“The (European) Commission’s objective is to set up a clear roadmap on how to ensure that CDS are cleared through a central clearing counterparty by the end of this year,” a statement from EU Internal Market Commissioner Charlie McCreevy said.
Regulators on both sides of the Atlantic want central clearing of credit default swaps as part of wider efforts to apply lessons from the worst financial crisis in 80 years.
A new working group of officials from mutual funds, insurers, banking and market regulators, the European Central Bank and market industry associations met in Brussels on Wednesday for the first time.
“All participants today confirmed that this was a reasonable timing,” the statement said of the clearing deadline.
“The industry seems to be saying that half the market could shift easily by the end of the year because credit derivative indexes are easier to move,” a source who attended the meeting said.
CDS indexes are used as a hedging tool against a basket of CDS or bonds and are standardised, while individual CDS against a specific company are traded off an exchange and are less standardised.
“The problem is with the single name derivatives, the corporates. Even though the contracts may be standardised using rules drawn up by the industry, it’s not clear it would be feasible to have them centrally cleared by the end of the year,” the source added.
The prospect of increased regulation has led exchanges to sense a money spinning opportunity through new revenue streams from clearing credit derivatives.
Two clearing competitors are emerging in Europe with Eurex, the clearing arm of Deutsche Boerse (DB1Gn.DE: Quote, Profile, Research, Stock Buzz), saying it could team up with banks to clear credit default swaps.
Transatlantic exchange operator NYSE Euronext (NYX.N: Quote, Profile, Research, Stock Buzz)(NYX.PA: Quote, Profile, Research, Stock Buzz), which operates exchanges in New York, Paris, Brussels, Amsterdam, Lisbon and London, also has said it was in the best position to clear the CDS market in Europe.
There are also proposals on CDS clearing in the United States from IntercontinentalExchange Inc (ICE.N: Quote, Profile, Research, Stock Buzz) and CME Group Inc (CME.O: Quote, Profile, Research, Stock Buzz).
CDS are contracts that protect a buyer from a debt default but are often speculatively traded. The functions of a clearing house include settling trading accounts, clearing trades and reporting trading data.
Industry officials have said a global clearing house would be more efficient.
“What the broker dealers are thinking is ‘why do we need a European solution when there is a solution in the U.S.’,” the source said.
Scott Hill, ICE’s chief financial officer, said that although the U.S. Federal Reserve is the most logical regulator for CDS, it is unlikely the EU and ECB will accept a U.S.-based solution for the global market.
A “two-pronged” approach was most likely, Hill told a conference in New York. “It’s not my sense that (the Fed) is likely to pick a winner,” he added. “I think it’s going to be left to the market to ultimately decide.”
Part of the EU working group’s remit will be to ensure coherence with work taking place in the United States and supervision by regulators. (Additional reporting by Jonathan Spicer in New York, editing by Mark John, Dale Hudson and Carol Bishopric)
http://www.reuters.com/article/marketsNews/idINL573611620081105?rpc=44&sp=true
A group of large Wall Street dealers are supporting a new electronic marketplace for credit-default swaps, responding to investor requests and regulatory pressure to make swap trading more transparent.
Nine banks, including Credit Suisse Group, J.P. Morgan Chase & Co. and Goldman Sachs Group Inc., plan to use an online platform operated by trading company TradeWeb LLC to trade certain types of credit-default swaps with investors such as hedge funds, foreign central banks and pension funds.
The banks earlier this year spent about $180 million to purchase minority stakes in TradeWeb, which moves trades for many types of bonds and is majority-owned by Thomson Reuters.
A Murky Market
Credit-default swaps are derivatives that act like insurance against bond and loan defaults. They trade over the counter, or directly between firms that have traditionally negotiated the terms of trades over the phone.
Swaps-trading activity and volumes are relatively opaque.
Because the swaps have intertwined the fortunes of many financial firms, there is concern about the risk they have created.
TradeWeb’s swaps platform, which went live in the U.S. earlier this week, facilitates electronic trades on credit-default-swap indexes.
These indexes are essentially bundles of credit-default swaps that are tied to the debt of dozens of companies.
They have more standardized contract terms than swaps tied to individual bonds, and make up a large chunk of the $47 trillion credit-default-swaps market.
Money managers at hedge funds, mutual funds and other institutional investors can view “live” credit-default-swap index prices on TradeWeb’s electronic platform and use it to request bids and offers from multiple dealers.
The trades will continue to take place directly between dealers and customers.
Transparent and Quicker
David Horowitz, a portfolio manager at Malbec Partners, said he used the TradeWeb platform to trade some swap indexes this week.
“I think it helps increase transparency in the markets and makes it quicker and easier to trade,” he said.
Lee Olesky, TradeWeb’s chief executive, said the company has been working on the credit-default-swap platform for several months, and dealers will use it to provide prices and liquidity to customers.
The company’s bond and derivatives platforms are used by more than 2,000 investors around the world to trade government bonds, mortgage securities and other types of contracts.
A Rival Offering
TradeWeb’s offering could rival an effort by derivatives exchange company CME Group Inc. and hedge-fund firm Citadel Investment Group LLC to attract market participants to a new exchange-like electronic platform for credit-default swaps.
Many investors believe exchanges will bring the most transparency to the swaps market.
However, banks that have traditionally facilitated most credit-default-swap trades are reluctant to move those transactions to an exchange because it may reduce their trading profits.
But Wall Street participants are preparing to clear their swap trades through a central clearinghouse by the end of this year.
http://online.wsj.com/article/SB122601902407007147.html?mod=testMod#articleTabs%3Darticle
Post a Comment