Sense on Cents

Does Michael Barnier, the European Union’s financial services commissioner, read Sense on Cents? If he doesn’t, he should. Why?

Today he touched upon an approach to dealing with credit derivatives which Sense on Cents made months ago. Bloomberg highlights, CDS Traders Face Disclosure Requirements in Europe,

Sovereign credit-default swap transactions face mandatory disclosure rules in the wake of the Greek debt crisis, the European Union’s financial services commissioner said today.

Michel Barnier said he would deal with the sovereign CDS market “very severely.”

“These people don’t like being out in the light of day,” Barnier said of sovereign CDS traders at a press conference in Brussels. “We’ll flood them with light.”

German Chancellor Angela Merkel and French President Nicolas Sarkozy have called for curbs on speculating with sovereign credit-default swaps, which many blame for exacerbating Greece’s fiscal woes.

Michel Petite, the former head of legal services at the European Commission and now a lawyer with Clifford Chance LLP, said it’s unclear how the CDS proposal would work.

“How exactly this would be done, I don’t know,” Petite said in a phone interview. “I think they’re still figuring it out.”

Creating increased transparency and disclosure is not all that difficult, although the financial industry would like to give the appearance that it is. What system brings about transparency and disclosure? As I initially highlighted last July in writing, Can We ‘TRACE” JP Morgan’s Business?,

There is little to no transparency in the world of customized derivatives and as a result the bid-ask spreads are very wide. Cha-ching, cha-ching. Jamie Dimon and his friends on Wall Street are working extremely hard to keep it this way.

In their defense, it is likely not functionally feasible to move many customized derivatives to an exchange. What should regulators compel them to do? JP Morgan and every other financial firm on Wall Street should have to report every derivatives transaction to a system known as TRACE, which stands for Trade Reporting and Compliance Engine. This system currently only covers transactions within the cash markets and not derivatives. What does that mean for investors? No transparency and price discovery for investors in the customized derivatives space.

Wall Street has been fighting as hard as it possibly can to maintain the profit margins in its derivatives business. I do not believe that derivatives should be be spun outside of depository institutions. Used properly, regulated effectively, and capitalized appropriately derivatives can be a very credible risk mitigant. That said, Barnier is right, a lot of light needs to be shone into this corner of the Wall Street casino? The light provided by TRACE should do just that.

Monsieur Barnier and Monsieur Petite, I strongly recommend you subscribe to Sense on Cents!!

LD

This entry was posted on Monday, May 17th, 2010 at 3:39 PM and is filed under Credit Derivative Swaps, General. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.