From WSJ.com ~~~ “…. Officials are looking for market players who, during August and September, may have spread false information to manipulate CDS prices, say the people familiar with the investigation. CDS prices have recently had strong influence over stock and bond prices of financial firms such as Morgan Stanley and American International Group Inc. The regulators are examining how interdealer brokers (IDB) also may have participated in or were used in any possible manipulation…. ” ~~~
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~~~~ ” …. “Counterparty risk has been a fundamental concern in the credit derivatives market since its inception,” said a spokesman for Mr. Brodsky (IDB trader).
“With no central clearing mechanism to address this issue, traders often demand to know who is on the other side of a transaction in advance of a trade. Anyone who suggests that there is anything untoward about requesting or providing such disclosure, especially given current market conditions, doesn’t understand the realities and complexities of the credit derivatives market or has an underlying agenda.” ~~~~
But isn’t the whole point of interdealer broking that the IDB clients are limited to large dealers creating in effect a pool of “equals”… the premise is that by excluding other market participants counterparty risk is eliminated… eh?
The truth is that IDB markets create the ultimate layer of opacity… no one regulates them… and that whole IDB edifice is just another dark corner of the CDS market… what I want to know is how the Federal Reserve would oversee and police this space which they lay claim to… the commerical banks which they oversee… JPM, GS, MS… etc are the biggest players… the Fed hasn’t been able for years to get the dealers to move to a central counterparty platform… how do they suggest getting the dealers to enforce some sort of transparency in this space? And further to help other market participants get pricing and/or trade data?
The uber smart boys over at CreditSights have quantified the dealer revenue for this rodeo… ~~~ “… Yet the opaque trading environment has made it easier for Wall Street banks to mark up prices charged to outside buyers, which in turn has made CDS trading a huge profit center for the banks. In all, CDS trading amounts to 15% to 25% of top Wall Street firms’ trading revenues, estimates CreditSights analyst David Hendler.” ~~~
How much are CDS blowups costing the global financial system? Maybe Glenn Reynolds or David Hendler at CreditSights could ballpark that number…
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