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Regulators Call for Public Reporting of CDS Prices, Volumes
November 17, 2008
U.S. regulators have introduced a set of policy objectives for the credit default swaps (CDS) market, including a call for mandated public reporting of prices, volumes and aggregate open interest.
The objectives were one of several initiatives announced Nov. 14 by the President’s Working Group on Financial Markets (PWG) to bring added oversight and infrastructural improvements to credit derivatives. Implementation of central counterparty clearing services for the instruments, said the PWG, is its “top near-term priority.” CME Group, IntercontinentalExchange, NYSE Euronext and Eurex are all planning to offer centralized clearing for the over-the-counter products.
The Federal Reserve Board, Securities and Exchange Commission and Commodity Futures Trading Commission have also signed a memorandum of understanding to, among other things, streamline the approval process for firms to clear CDS and provide consistent oversight of the clearing function. “A well-regulated and prudently managed CDS central counterparty can provide immediate benefits to the market by reducing the systemic risk associated with counterparty credit exposures,” said the PWG. “It also can help facilitate greater market transparency and be a catalyst for a more competitive trading environment that includes exchange trading of CDS.”
Greater cooperation between regulatory bodies is one of the recommendations made by the PWG--comprised of the top officials at the Treasury Department, Fed, SEC and CFTC--as are improving the transparency and integrity of the CDS market, enhancing risk management and bolstering infrastructure. The group, which said the new objectives are “broader” than a set it issued in March, will work with other regulators and market participants to achieve the goals over the next several months and, where necessary, support new legislation.
Regulators, said the PWG, should have access to trade and position data housed at central counterparties and trade repositories so they can identify potential issues and prevent market manipulation and insider trading.
The Depository Trust & Clearing Corp. (DTCC) on Nov. 4 began publishing weekly aggregate data for some of the contracts placed by dealers in its Trade Information Warehouse. Whether regulators are satisfied with the utility’s disclosure initiative is uncertain.
A source at an institutional trading platform that offers credit default swaps called the DTCC data “better than nothing,” adding that “it’s meaningful from a relative standpoint. It’s aggregate, but it has the number of trades and there’s a breakout between dealer-to-dealer and the dealer-to-customer. We’ll need to triangulate to interpret the data: It’s not as if they’re going to serve it up and say, ‘These ten banks did this much volume each day for the last two weeks.’ But I think it’ll help.”
The PWG wants to require that trade details for all CDS not cleared through a centralized service be retained in a “central contract repository,” which “should be encouraged for other OTC derivatives asset classes.” The industry and regulators have also been working on improving processing of interest rate swaps, and commodity, equity and foreign exchange derivatives.
The group is also promoting the use of exchanges or “similar” platforms for standardized CDS contracts. “These trading venues should provide pre-trade transparency to their participants,” said the PWG. Participants should also be able to bilaterally negotiate customized contracts, subject to oversight by prudential supervisors.
“The virtually unregulated over-the-counter market in credit default swaps has played a significant role in the credit crisis, including the now $167 billion taxpayer rescue of AIG,” said SEC chairman Christopher Cox in a separately issued statement. “Bringing transparency to this market is vitally important. The SEC has regulatory and supervisory authorities over the clearing agencies that may be established for credit default swaps, and we will use those authorities to strengthen the market infrastructure and to protect investors.” Cox has urged Congress to enact legislation giving his agency regulatory authority over credit derivatives.
