Fifteen of the biggest players in the $14 trillion market for credit insurance are also the referees.
Firms such as JPMorgan Chase & Co. and Goldman Sachs Group Inc. wrote the rules, are the dominant buyers and sellers and, ultimately, help decide winners and losers.
Has a country such as Argentina paid what it owes? Has a company like Caesars Entertainment Corp. kept up with its bills? When the question comes up, the 15 firms meet on a conference call to decide whether a default has triggered a payout of the bond insurance, called a credit-default swap. Investors use CDS to protect themselves from missed debt payments or profit from them.
Once the 15 firms decide that a default has taken place, they effectively determine how much money will change hands.
And now, seven years after the financial crisis first brought CDS to widespread attention, pressure is growing inside and outside what’s called the determinations committee to tackle conflicts of interest, according to interviews with three dozen people with direct knowledge of the panel’s functioning who asked that their names not be used. Scandals that exposed how bank traders rigged key interest rates and fixed currency values have given ammunition to those who say CDS may also be susceptible to collusion or, worse, outright manipulation. (...)
CDS on corporate and sovereign debt, which are subject to the panel’s decision-making, have bubbled into prominence lately. The plummeting price of oil and other commodities has caused some corporations and governments to struggle to keep current with creditors. For instance, CDS prices are showing that traders have priced in 95 percent odds that Venezuela will default within five years, according to S&P Capital IQ CDS data released Tuesday.
The stakes go far beyond a few hedge funds and banks. Although the market for credit insurance on individual companies and countries has shrunk by 59 percent since 2008, more money is now invested in benchmark CDS indexes than at any time since the committee’s creation in 2009, according to the Depository Trust & Clearing Corp. Mutual funds increasingly use CDS because they’re having trouble finding bonds to trade. That means the determinations committee is increasingly affecting the $3.5 trillion of bond mutual funds, a staple of U.S. retirement savings.
Though the determinations committee has rendered more than 1,000 judgments in the last six years, no records of its discussions have ever been made public -- nor is ISDA proposing they be.
“The problem is there’s no ability for an independent body to determine whether or not the process is fair, which ISDA says it is,” said Dennis Kelleher, CEO of Better Markets Inc., a Washington-based nonprofit watchdog group. (...)
Determining whether a company or government has formally defaulted might sound easy, but bonds are often freighted with covenants and structures that are virtually indecipherable to anyone but lawyers and traders.
Before the determinations committee was created, CDS sellers facing payouts on the insurance might insist a “default event” hadn’t been triggered.
After the collapse of Lehman Brothers Holdings Inc. in September 2008 exposed the complexity of the CDS market, Timothy Geithner, then president of the Federal Reserve Bank of New York, decided it needed an overhaul -- and fast. At his bidding, executives of the largest CDS dealers and money management firms met at Goldman Sachs’s headquarters in Lower Manhattan. Working with markers on paper white boards, the group drew up a new system for improving the settlement of CDS obligations.
Their solution: Let us decide.
by Nabila Ahmed, Bloomberg | Read more:
Image: via:
Firms such as JPMorgan Chase & Co. and Goldman Sachs Group Inc. wrote the rules, are the dominant buyers and sellers and, ultimately, help decide winners and losers.
Has a country such as Argentina paid what it owes? Has a company like Caesars Entertainment Corp. kept up with its bills? When the question comes up, the 15 firms meet on a conference call to decide whether a default has triggered a payout of the bond insurance, called a credit-default swap. Investors use CDS to protect themselves from missed debt payments or profit from them.Once the 15 firms decide that a default has taken place, they effectively determine how much money will change hands.
And now, seven years after the financial crisis first brought CDS to widespread attention, pressure is growing inside and outside what’s called the determinations committee to tackle conflicts of interest, according to interviews with three dozen people with direct knowledge of the panel’s functioning who asked that their names not be used. Scandals that exposed how bank traders rigged key interest rates and fixed currency values have given ammunition to those who say CDS may also be susceptible to collusion or, worse, outright manipulation. (...)
CDS on corporate and sovereign debt, which are subject to the panel’s decision-making, have bubbled into prominence lately. The plummeting price of oil and other commodities has caused some corporations and governments to struggle to keep current with creditors. For instance, CDS prices are showing that traders have priced in 95 percent odds that Venezuela will default within five years, according to S&P Capital IQ CDS data released Tuesday.
The stakes go far beyond a few hedge funds and banks. Although the market for credit insurance on individual companies and countries has shrunk by 59 percent since 2008, more money is now invested in benchmark CDS indexes than at any time since the committee’s creation in 2009, according to the Depository Trust & Clearing Corp. Mutual funds increasingly use CDS because they’re having trouble finding bonds to trade. That means the determinations committee is increasingly affecting the $3.5 trillion of bond mutual funds, a staple of U.S. retirement savings.
Though the determinations committee has rendered more than 1,000 judgments in the last six years, no records of its discussions have ever been made public -- nor is ISDA proposing they be.
“The problem is there’s no ability for an independent body to determine whether or not the process is fair, which ISDA says it is,” said Dennis Kelleher, CEO of Better Markets Inc., a Washington-based nonprofit watchdog group. (...)
Determining whether a company or government has formally defaulted might sound easy, but bonds are often freighted with covenants and structures that are virtually indecipherable to anyone but lawyers and traders.
Before the determinations committee was created, CDS sellers facing payouts on the insurance might insist a “default event” hadn’t been triggered.
After the collapse of Lehman Brothers Holdings Inc. in September 2008 exposed the complexity of the CDS market, Timothy Geithner, then president of the Federal Reserve Bank of New York, decided it needed an overhaul -- and fast. At his bidding, executives of the largest CDS dealers and money management firms met at Goldman Sachs’s headquarters in Lower Manhattan. Working with markers on paper white boards, the group drew up a new system for improving the settlement of CDS obligations.
Their solution: Let us decide.
by Nabila Ahmed, Bloomberg | Read more:
Image: via:
