Milbank Derivatives partner John Williams was recently quoted in the Bloomberg article “Wall Street’s Shady Swap Trades Spark Pushback from Regulators.” The article discusses the joint announcement in June by the Commodity Futures Trading Commission, US Securities and Exchange Commission and the UK’s Financial Conduct Authority that they are working together to examine issues associated with CDS (credit default swap) trading and practices they believe may be manipulating the market. The article notes that regulators are concerned that the changes to the CDS contract recently proposed by ISDA (International Swaps and Derivatives Association) may be too narrow to prevent all the ways that market participants may engineer questionable corporate actions to achieve benefits on their CDS contracts. ISDA’s March 2019 proposal – slated to take effect in November – addressed issues relating to “Narrowly Tailored Credit Events” and are intended to remove the incentive for CDS buyers to enter into agreements that would “manufacture” failure to pay Credit Events not related to a deterioration of the borrower’s creditworthiness or financial position.
The reproach from regulators does not, however, provide details addressing precise areas that should be changed. “If regulators want to improve the market, and I applaud their efforts,” said Mr. Williams, “I would really encourage them to share their specific concerns, including concrete examples of transactions they see as potentially harmful to the markets, so we can roll up our sleeves and get to work together.”
