Opinion: Germans resist naked swaps

The International Swaps and Derivatives Association (ISDA), a group that represents participants in the privately negotiated derivatives industry, protested, in March, that naked credit default swaps are not “burning down the house.” But after Germany banned the naked sales this week, the ISDA softened its tone, writing in a news release that the organization “recognizes the concerns of national authorities in managing the volatility in their respective government debt markets.”

It’s hard to say with accuracy how large recent trading in naked credit default swaps on European sovereign debt has been, because that information is not public. It is not provided to the Depository Trust & Clearing Corporation (DTCC), according to a spokesman, which posts information about credit default swaps on its website. Only the regulators and the bankers know for sure. When trying to make derivatives more transparent, this would seem to be one area in need of vast improvement.

Government officials worldwide are grappling with how to rein in naked credit default swaps. In March, Gary Gensler, head of the U.S. Commodities Futures Trading Commission, suggested that judges restrict or limit “empty creditors,” purchasers of naked credit default swaps, from participating in bankruptcy proceedings.

The ISDA and other derivative organizations are in an intense race against regulation and are trying to make their business as transparent as possible. But the ISDA erred in their Big Bang protocol last year by not making CDS include restructuring for U.S. investors, while CDS contracts in Europe still include restructuring clauses. “That means the CDS prices in different countries still mean different things, which will hinder coordinated industry development of pricing models and applications,” said Joseph R. Mason, a finance professor at the Wharton School, in his appearance before the U.S. House Financial Services Subcommittee on Capital Markets.

It certainly seems like the rules regarding CDS should be written with international consistency to foster resolution between the investor and the country. Investors should take the first losses.

Based on estimates from Deutsche Bank, Greece’s sovereign debt could lead to as much as 75 billion euros of losses for European banks. Josef Ackermann, chief executive of Deutsche Bank, told German television ZDF this week that he doubted Greece would be able to repay its debt. Greece has not agreed yet to a voluntary restructuring.

Credit default swaps provide a very useful role in protecting investors and helping to free up capital that can in turn be invested elsewhere. The aim is to figure out how to make them less destructive, and more responsible, so that governments don’t have to continue bailing out companies, banks or other governments.

The U.S. Senate financial overhaul bill must now be reconciled with the House version approved in December, which could happen within the next month.

Governments would appear to have the upper hand in their struggle with the financial sector since they are, after all, the only entities with the power to bring the banking system and other countries back from the brink. As more politicians are turned out of office by voters who are tired of their timidity, it seems they are finally gaining the courage to exercise their authority.

 

http://www.globalpost.com/dispatch/worldview/100520/angela-merkel-financial-derivatives-debt-crisis-greece-economy