Thursday, March 4, 2010

Banks Summoned by EU to Discuss Sovereign CDS Market

Original posted on Bloomberg by Ben Moshinsky:

Banks and regulators across Europe were summoned by the European Commission to discuss regulation of the market for sovereign credit-default swaps in the wake of the Greek debt crisis.

The European Union’s executive agency will hold a meeting in Brussels “shortly,” Chantal Hughes, a commission spokeswoman, said in an e-mailed statement today. The talks, which will take place as soon as March 5, will cover CDS pricing and links to the sovereign bond market, according to three people familiar with the discussions.

Credit-default swaps on Greek bonds fell to the lowest in seven weeks on speculation government plans for extra deficit cuts will calm the sovereign debt market. Commission President Jose Barroso said Greece’s deficit-reduction program “is now on track” after the country pledged an additional 4.8 billion euros ($6.6 billion) of budget cuts. EU leaders had called for greater austerity measures before considering aid.

Speculation using naked CDS, where investors take out insurance on bonds they don’t own, may “be very destabilizing,” with “costs much greater than the benefits,” Nobel laureate Joseph Stiglitz said in an interview with Bloomberg Television today.

Bond speculators worldwide are under increasing regulatory scrutiny. Michel Barnier, the EU’s financial services commissioner, said yesterday that the EU would probe sovereign CDS trading.

Derivative Products

Adair Turner, head of the U.K.’s Financial Service Authority, yesterday questioned the usefulness of some derivative products, while testifying before a parliamentary committee.

The speed of the commission’s reaction is “surprising”, Karel Lannoo, chief executive of the Centre for European Policy Studies, said in a telephone interview today. “It’s only a week or so that the CDS story has been around.”

Barnier said yesterday that the commission’s investigation “is not something we’re doing alone. The Americans are doing the same.”

The U.S. Department of Justice is asking hedge funds not to destroy trading records on euro bets, according to a person with knowledge of the requests sent to managers who attended a dinner hosted by New York-based research and brokerage firm Monness, Crespi, Hardt & Co. on Feb. 8.

National Supervisors

The commission will meet with national financial supervisors on the morning of March 5 and CDS market participants in the afternoon, according to the people, who didn’t wish to be identified because the meetings are private.

“We are looking at the issue very closely,” commission spokeswoman Hughes said. “We need to be vigilant. We will be calling shortly a meeting of regulators, supervisors and the industry to discuss.”

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a country or company fail to adhere to its debt agreements. A basis point on a credit-default swap protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

Deutsche Bank AG, Germany’s biggest bank, will attend the meeting, said a person familiar with the talks.

Deirdre Leahy, a spokeswoman for the International Swaps and Derivatives Association in New York, declined to immediately comment.

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