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View Full Version : Behind Credit Default Swaps Market, a Cartel Left Open to Collusion



boutons_deux
07-18-2012, 11:53 AM
The rate-manipulation scandal has demonstrated that banks will collude with one another for their own benefit.

Banks didn’t report the rate at which they were borrowing from other institutions. They could report a made-up rate that, not surprisingly, turned out to serve their economic interests at the time.

So, it might come as a worry that there is another, multitrillion-dollar market — the credit default swap market — that operates under a similar principle

Whether a company has defaulted on its debt might seem unambiguous to some naïve souls out there. But that’s hardly the case, especially when there are lawyers involved and billions of dollars at stake. Because credit default swap contracts can be worthless when they expire, the timing of insolvencies can make the difference between making and losing a great deal of money.

Decisions about when a swap pays out are made by a trade group called the determinations committee of the International Swaps and Derivatives Association. The mere fact that a determinations committee exists is evidence that “insolvency” is not simple to define.

Sure, credit default swaps are products for grown-ups. Sophisticated investors play in this market. Foster children and the infirm are not putting their life savings into this market directly.
Robert Pickel, chief of the International Swaps and Derivatives Association.Brendan Hoffman/Bloomberg NewsRobert Pickel, chief of the International Swaps and Derivatives Association.

But they matter to corporations and countries. When Europe tried to bail out Greece, an enormous debate sprang up about whether the restructuring of Greece’s debt was technically considered a “default.” Initially, the committee said it wasn’t. Then, after some details shifted, the committee ruled it was.

A proper market would want an organization that was impartial, regulated, transparent and open to appeal.

The determinations committee has 15 members, 10 of which are the major dealers in credit default swaps, the giant banks that are effectively permanent members. One criterion for dealer members is that they trade a certain amount of derivatives. In the wake of the 2008 financial crisis, there are fewer such firms, and they have consolidated their influence and power over our capital markets.

The committee operates as a quasi-Star Chamber. It makes decisions without having to publish its reasoning and almost never has. There isn’t any appeal process. The committee itself says it isn’t bound by precedent.

Sure, regulators can now get access to dealers’ positions. And if that eases your concerns, I’m sure Barclays would like to make you a loan tied to the London interbank offered rate, the dubious benchmark at the center of the scandal.

Other remedies seem pretty apparent. Banks could disclose their positions ahead of rulings. The committee could issue its reasoning, which the association says it’s planning to do. There could be an appeals process.

That banks haven’t taken these steps yet is a display of the industry’s casual disregard for any significant checks on their cartel businesses. It’s a situation that has become so routine on Wall Street as to almost be unremarkable.

http://dealbook.nytimes.com/2012/07/18/behind-credit-default-swaps-market-a-cartel-left-open-to-collusion/?src=twrhp

Winehole23
12-07-2015, 12:10 PM
U.S. regulators are examining whether banks colluded in setting prices in the derivatives market where investors speculate on credit risk, according to a person with knowledge of the matter.


The U.S. Securities and Exchange Commission is probing whether firms acted in unison to distort prices in the $6 trillion market for credit-default swaps indexes, said the person, who asked not to be identified because the investigation is private. The regulator is trying to determine if dealers have misrepresented index prices, the person said. The credit-default swaps benchmarks allow investors to make bets on the likelihood of default by companies, countries or securities backed by mortgages.


Judy Burns, an SEC spokeswoman, declined to comment.

http://www.bloomberg.com/news/articles/2015-12-05/banks-said-to-face-sec-probe-into-possible-credit-swap-collusion

boutons_deux
12-07-2015, 12:25 PM
http://www.bloomberg.com/news/articles/2015-12-05/banks-said-to-face-sec-probe-into-possible-credit-swap-collusion

SEC toothlessly barking, no bites to be delivered.

Repug whores have done their best to defang IRS, SEC

http://www.politico.com/story/2014/06/irs-sec-funding-house-gop-cuts-107940