Friday, October 31, 2008

DTCC May Raise Credit-Default Swap Disclosure Amid Criticism

(Bloomberg) The Depository Trust & Clearing Corp., which operates a central registry for the $55 trillion credit- default swap market, may agree to disclose more data to counter criticism the derivatives amplified the financial crisis.

New York-based DTCC has discussed with banks, brokers and others that own the company ``whether or not there's any broader access to information we might provide,'' spokesman Stuart Goldstein said in an interview yesterday, declining to elaborate on what data may be published.

The DTCC earlier this month began releasing some information on trades in the registry to clear ``misconceptions'' about credit-default swaps following the bankruptcy of Lehman Brothers Holdings Inc., among the market's largest dealers.

Credit-default swap traders have come under increased scrutiny since Lehman collapsed last month and the U.S. government was forced to rescue American International Group Inc., which faced bankruptcy after rating downgrades forced it to post more than $10 billion in collateral on credit swap trades that had plunged in value.

Officials from U.S. Securities and Exchange Commission Chairman Christopher Cox to New York Insurance Superintendent Eric Dinallo have called for increased regulation of the swaps. Dinallo, in an interview that aired Oct. 26 on the CBS news show ``60 Minutes,'' called the market ``legalized gambling.''

After estimates from analysts that as much as $400 billion in credit swaps may have been tied to Lehman, raising concerns that hedge funds and others may struggle to make good on the bets, DTCC said only $5.2 billion had to be paid out from among the $72 billion of total contracts in the registry.


``The market would benefit from the information that DTCC has,'' said Brian Yelvington, a strategist at fixed-income research firm CreditSights Inc. in New York. Had data on Lehman been released sooner, ``there would not have been as much fear- mongering,'' he said.

About 90 percent of credit swap trades are electronically matched and confirmed through the DTCC's network, according to the company's annual report, suggesting that most trades since the end of 2006 are recorded in the registry. DTCC has said it has backloaded ``the vast majority'' of outstanding trades into the registry, known as the Trade Information Warehouse.

DTCC is controlled by a board of members, including JPMorgan Chase & Co., Goldman Sachs Group Inc. and other dealers that created and control trading in the credit-default swap market. Trading exploded the past decade as the market went from being largely a tool for banks to hedge loans to a place where hedge funds, insurance companies and other asset managers could speculate on the creditworthiness of companies, governments and other borrowers including homeowners.

Misguided Criticisms

Many criticisms leveled at the market are misguided, according to Robert Pickel, head of the International Swaps and Derivatives Association in New York, the industry group that sets standards for traders. The contracts are an effective tool to hedge against losses, and the losses that toppled firms such as AIG were triggered by the underlying loans, not the derivatives, he said.

``We do need to look at how more information, certainly to regulators if not to the general public, can be distributed,'' Pickel said in an interview this week. ``We certainly understand the interest now in having that more widely available, and the Trade Information Warehouse is probably the best source of that.''

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