Friday, 13 February 2009

U.S. May Suspend Temporarily CDS Trading, According to Reuters

This is a wee old, but I have been quite busy these days trying to earn some honest money. Well, check this -- it seems important and with the potential to derail the growth of a market aimed at redistributing and diminishing risks. You will read this in the story but anyways, Reuters says ''Credit default swaps have been blamed for spreading the risks of bad assets, including residential mortgages, which caused massive losses to companies around the world and for amplifying the impact of financial turmoil.´´ Perhaps, this step is necessary to pave the way for more stringent self-regulation in this market that, it must be said, remains opaque to most investors and regulatory agencies.

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''WASHINGTON, Feb 11 (Reuters) - The U.S. futures industry regulator would be empowered under a bill filed by the House Agriculture Committee chairman on Wednesday to suspend trading in credit default swaps if needed to protect investors and the financial market.

The bill also would require clearing of over-the-counter transactions through entities registered with the Commodity Futures Trading Commission or the Securities and Exchange Commission, according to a summary. It said banks could clear OTC transactions if they registered with CFTC as a derivatives clearing organization or with the SEC as a clearing agency. The Federal Reserve would be barred from regulating clearing houses. CFTC would gain criminal prosecutorial power under the bill, which is scheduled for committee discussion and vote on Thursday afternoon. Committee chairman Collin Peterson, Minnesota Democrat, has said he hopes for committee approval of the bill this week.


An earlier draft would have banned "naked" CDS and limit the instrument to investors who can show a need, such as owning the underlying bonds. Financial industry groups said a ban would destroy the U.S. market for CDS and impair the availability of credit. Instead, the bill empowers the CFTC, if the president agrees, to "summarily suspend trading in any credit default swap" to protect investors and the markets.


Credit default swaps have been blamed for spreading the risks of bad assets, including residential mortgages, which caused massive losses to companies around the world and for amplifying the impact of financial turmoil. While the bill would require clearing of OTC transactions, it allows an alternative of reporting the transactions to CFTC. That path would require investors to show their financial integrity and the soundness of the transaction.


The bill includes anti-speculation provisions aimed at energy and agricultural futures contracts. They were in a bill that passed the House, 283-133, last September. They require foreign exchanges to adopt reporting and disclosure rules that mirror U.S. standards, require position limits on agricultural and energy contracts and allow CFTC regulation of look-alike OTC energy and agricultural contracts.´´

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