Financial Crisis News Center

Initial CDS Insider Trading Case Survives Challenge

This story appeared in Jim Hamilton's World of Securities Regulation.

The first insider trading action filed by the SEC alleging misconduct in the credit default swaps market (SEC v. Rorech) survived a motion for judgment on the pleadings. The complaint, filed in the U.S. District Court for the Southern District of New York, alleged Renato Negrin, a former portfolio manager at hedge fund investment adviser Millennium Partners, L.P., and Jon-Paul Rorech, a salesman at Deutsche Bank Securities Inc., engaged in insider trading in the credit default swaps of VNU N.V., an international holding company.

SEC Extends and Modifies Temporary Exemptions for ICE Trust U.S. LLC

This story appeared in Bank Digest.

The SEC has issued an order extending the temporary ICE Trust U.S. LLC conditional exemption from clearing agency registration under Section 17A of the Securities Exchange Act of 1934 (1934 Act) solely to perform the functions of a clearing agency for certain non-excluded credit default swap (CDS) transactions. The order also extends the temporary exemption of eligible contract participants and others from certain 1934 Act requirements with respect to nonexcluded CDS cleared by ICE Trust. In addition, the order conditionally exempts, on a temporary basis, ICE Trust clearing members from broker-dealer registration requirements and related requirements in connection with using ICE Trust to clear CDS transactions of their customers. The SEC has also extended the temporary exemption of ICE Trust and certain of its clearing members from the registration requirements of Sections 5 and 6 of the 1934 Act solely in connection with the calculation of mark-to-market prices for nonexcluded CDS cleared by ICE Trust. These temporary exemptions expire on March 7, 2010.

Issa Questions Back-Door Bailout

This story appeared in Bank Digest.

House Committee on Oversight and Government Reform Ranking Member Darrell Issa, RCalif., sent letters today to the Federal Reserve Bank of New York (FRBNY) and American International Group, Inc.(AIG) requesting “all records and communications referring or relating to the FRBNY’s negotiations with AIG’s credit default swaps counterparties that resulted in $13 billion of debt put on the backs of the American taxpayers.” Issa added “Behind closed doors and with no approval from Congress, the FRBNY may have added an additional $13 billion of debt on the backs of taxpayers. These allegations, if true, amount to nothing less than a backdoor bailout of AIG’s creditors.”

Issa Letter  ; FRBNY Letter ; AIG Letter

OCC Publishes Working Paper on Credit Risk

This story appeared in Bank Digest.

The Office of the Comptroller of the Currency has released OCC Working Paper 2009-5 “Correlation in Credit Risk", by Xiaoling Pu and Xinlei Zhao which examines the correlation in credit risk using credit default swap (CDS) data. The researchers found that the observable risk factors at the firm, industry, and market levels and the macroeconomic variables cannot fully explain the correlation in CDS spread changes, leaving at least 30 percent of the correlation unaccounted for.

Finance Committee Chairman Comments on SIGTARP Report

This story appeared in Bank Digest.

In response to the quarterly report of Special Inspector General for the Troubled Asset Relief Program Neil Barofsky, Senate Finance Committee Chairman Max Baucus, D-Mont., said that “we now have a good summary from the Special IG of how the Treasury Department is running the program every quarter.” He added that “I am also pleased that the Department decided to follow the Special IG’s recommendation requiring managers for the Public Private Investment Program (PPIP) to disclose all of their assets or exposures to related liabilities, including credit default swaps. I will follow up with the Secretary of Treasury on the Special IG’s ;request that his office be allowed to comment on any change in PPIP compliance rules, and that his office have access to fund manager information maintained by the Treasury Department.”

http://finance.senate.gov/press/Bpress/2009press/prb102109.pdf

House Derivatives Legislation Represents Compromise with Moderate Democrats; Ag Committee Approves Legislation

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter; and CCH Derivatives Regulation Law Reporter.

The OTC Derivatives Markets Act, HR 3795, that was favorably reported out of the House Financial Services Committee is a consensus-based piece of legislation representing significant input from moderate Democrats. Members of the New Democrat Coalition worked with Chairman Frank to bring this legislation to fruition. The legislation incorporates provisions from the Derivatives Trading Accountability and Disclosure Act HR 3300, which was backed by the New Democrat Coalition.

Chairman Schapiro Remarks on Future of Financial Regulation

By Gregg D. Killoren, J.D., CCH State Banking Law Reporter, Bank Digest and Individual Retirement Plans Guide.

SEC Chairman Mary L. Schapiro, speaking at the University of Rochester's Presidential Symposium on the Future of Financial Regulation on Oct. 10, 2009, commented on gaps in financial regulation that need to be addressed, a constructive approach to systemic risk, and steps being taken by the SEC, apart from legislation, to achieve reform.

SEC Asks for Changes to House Draft Derivatives Legislation to Prevent Regulatory Arbitrage

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter; and CCH Derivatives Regulation Law Reporter.

While praising the House Financial Services Committee’s draft legislation to regulate the OTC derivatives markets, the SEC warned that the draft could present opportunities for significant regulatory arbitrage. In testimony before the committee, Henry T.C. Hu, Director of the Risk, Strategy and Financial Innovation Division said that the draft adopts a distinction that is not meaningful between derivatives referencing a single security or a narrow-based index of securities and derivatives referencing a broad-based index of securities. The SEC cautioned that a market participant could use a broad-based swap as part of a strategy to gain highly targeted exposure to a single company or a narrow group of companies.

Hedge Fund Industry Supports House Draft Legislation Regulating OTC Derivatives Markets

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter; and CCH Derivatives Regulation Law Reporter.

The hedge fund industry has expressed qualified support for the House Financial Services Committee draft legislation regulating the OTC derivatives markets. In testimony before the committee, the Managed Funds Association expressed full support for the broad goals of the Over-the-Counter Derivatives Markets Act of 2009 to reduce systemic risk through the use of central clearing houses, the segregation of customer collateral by central clearing houses, and by providing customers with the option of having their collateral for customized swaps segregated. The MFA also endorsed provisions increasing transparency through trade and position reporting and providing the government with additional authority to avert and respond to economic or financial turmoil without disrupting ordinary market operations. The draft is being circulated by Barney Frank, the committee Chair. It is expected to be marked up in October.

Chairman Frank Circulates Draft Legislation Regulating OTC Derivatives

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter; and CCH Derivatives Regulation Law Reporter.

Rep. Barney Frank, Chair of the Financial Services Committee, has introduced draft legislation regulating the OTC derivatives markets by mandating exchange clearing and trading for the majority of derivatives products while preserving the over-the-counter market for specialized derivatives. The Chair’s draft is designed to implement the broad goals of the Obama Administration to increase transparency and eliminate systemic risk in the OTC derivatives markets while at the same time protecting end users seeking to hedge their risks and preventing much of the U.S. derivatives market from being forced overseas.