Wednesday, November 19, 2008

Disclosure Demands for Credit Swaps Said to Increase

(Bloomberg) U.S. regulators may require banks and insurers to disclose data about all credit-default swap trades to a central registry to boost transparency in the $47 trillion market, a person with knowledge of the talks said.

The Federal Reserve Bank of New York and the U.S. Securities and Exchange Commission want information about credit-default swaps that don't meet standard terms to be disclosed to a warehouse that would record all trades, said the person, who declined to be identified because the discussions are private. The rules would offer details about the types of contracts that almost drove American International Group Inc. into bankruptcy.

While information on $33 trillion of credit-default swaps is kept by the Depository Trust & Clearing Corp., which operates a central registry, the market may be as much as $14 trillion larger, according to data compiled by the International Swaps and Derivatives Association. Regulators are demanding more oversight after speculation in the unpoliced market contributed to the bankruptcy of Lehman Brothers Holdings Inc. and forced the government to take control of New York-based AIG.

``If you had this data center then you have a much better foundation for making policy decisions,'' said Henry Hu, a law professor at the University of Texas in Austin, who has called for warehouses spanning all over-the-counter derivatives markets.

Sharing Agreement
The President's Working Group on Financial Markets agreed on Nov. 14 to share information and help strengthen oversight, and said at least one central counterparty would be running by the end of the year.

The group also said details of all credit-default swaps -- financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt -- should be recorded, without providing specifics of a plan. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

Credit-default swaps on the benchmark Markit CDX North America Investment-Grade index of 125 companies in the U.S. and Canada jumped 14 basis points to 239 basis points as of 8:32 a.m. in New York, according to broker Phoenix Partners Group. Contracts on European banks and insurers climbed 8 1/2 basis points today to 130, the highest in more than six weeks, according to JPMorgan Chase & Co. prices on the Markit iTraxx Financial index.

`Always Looking'
Prices of the credit-default swaps typically increase when a borrower's creditworthiness deteriorates, and vice versa. The world's biggest financial institutions reported $967 billion of writedowns and losses since the start of 2007 as the credit markets froze. A basis point is 0.01 percentage point.

``We are always looking to add new products into the platform,'' said Judy Inosanto, a spokeswoman for the DTCC. She said the company had no specific plans to announce.
New York Fed spokesman Andrew Williams declined to comment. SEC spokesman John Nester didn't immediately return a telephone message.

Dealers agreed to begin handling trades by the end of the year through at least one central clearinghouse that would back the contracts and absorb losses should a dealer collapse. CME Group Inc., Intercontinental Exchange Inc. of Atlanta, NYSE Euronext and Eurex have submitted proposals to run a central counterparty to back trades.

Regulator Pressure
Dealers and investors in the credit-default swaps market began recording most trades two years ago in a registry run by DTCC, the New York-based company that settled more than $1.86 quadrillion of transactions in stocks and bonds last year. The so-called Trade Information Warehouse gave the market its first central system for settling contracts after defaults and processing payments.

DTCC, which is owned by some of the largest dealers and investors, also started making some of the data public this month after pressure from regulators. The warehouse only captures trades processed electronically. DTCC said last week it recorded a total of about $32.7 trillion contracts.
ISDA conducts a broader survey of its members and estimated there are more than $47 trillion in contracts outstanding.

While regulators don't expect terms of all trades to be recorded in a registry, basic details could include which security is being protected, how much and by whom, the person said. The increased disclosure would give regulators enough data to identify potential trouble spots, he said.

MBIA, Ambac
AIG ceded control to the U.S. government on Sept. 17 in a bailout when it was unable to come up with collateral on $440 billion in credit-default swaps backing collateralized debt obligations.
Such transactions typically aren't kept by the warehouse because they don't adhere to standard documents under which the most common credit-default swaps trade.

Armonk, New York-based MBIA Inc. and Ambac Financial Group Inc. both lost their AAA ratings this year as the value of credit swaps tied to CDOs and other debt plunged. MBIA has said it sold $126.3 billion in guarantees on pieces of CDOs backed by corporate bonds, mortgages and other debt. New York-based Ambac sold $60.7 billion in guarantees, mostly through credit swaps, the company said.

CDOs parcel fixed-income assets such as bonds or loans and slice them into new securities of varying risk, typically providing higher returns than other investments of the same rating.

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