Credit Derivatives

FASB Re-Opens for Comment Guidance on Embedded Credit Derivatives Exception


On October 13, 2009, the Financial Accounting Standards Board (“FASB”) re-opened for comment a proposed Accounting Standards Update, Scope Exception Related to Embedded Credit Derivatives (the “Update”),[1] which is intended to clarify when companies using financial instruments with embedded credit derivatives features do not have to apply derivatives accounting rules that require separate accounting of the credit derivative from the contract in which it is embedded. READ MORE

SEC Extends Temporary Exemptions Granted to Facilitate Central Clearing and Settlement of CDS


On September 14, 2009, the Securities and Exchange Commission (“SEC”) issued a release (the “Extension Release”) which extended the expiration dates of five interim final temporary rules (the “Interim Rules”) it had adopted in January 2009 under the Securities Act of 1933, as amended (the “Securities Act”), the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Trust Indenture Act of 1939, as amended, relating to credit default swaps (“CDS”).  The Interim Rules were adopted in connection with temporary exemptive orders issued by the SEC to foster the development and facilitate the operation of central clearing counterparties (“CCPs”) for eligible types of CDS.  Among other things, the Interim Rules temporarily (i) exempt from all provisions of the Securities Act (except the anti-fraud provisions) eligible CDS transactions that are offered and sold only to “eligible contract participants” (as defined in Section 1a(12) of the Commodities Exchange Act of 2000, as amended) and that are cleared by either a CCP satisfying specified conditions for exemption set forth in its exemptive order or a clearing agency registered under Section 17A of the Exchange Act; (ii) exempt any exchange that effects transactions in eligible CDS from the requirements of Sections 5 and 6 of the Exchange Act to register as a “national securities exchange” and (iii) exempt any broker or dealer that effects transactions on an exchange in eligible CDS from the requirements of Section 5 of the Exchange Act. READ MORE

ISDA Announces Results of Mid-Year 2009 Market Survey


The International Swaps and Derivatives Association, Inc. (“ISDA”) announced the results of its Mid-Year 2009 Market Survey (the “Survey”) of privately-negotiated derivatives at its regional conference in New York City on September 15, 2009. The Survey results indicated that the notional amounts outstanding over the past six months of interest rate derivatives increased by 3% to $414.1 trillion, of equity derivatives remained flat at $8.8 trillion and of credit derivatives decreased by 19% to $31.2 trillion. Each of these products has seen a decline in notional amounts outstanding over the past year by 11%, 26% and 43%, respectively.

The Survey cautioned that the notional amounts outstanding reflected only approximate market activity, not risk. It also pointed out that, as of December 2008, according to the Bank for International Settlements, the gross market value (i.e., the cost of replacement) of all derivatives was approximately 5.7% of outstanding notional amount and the net credit exposure (i.e., after netting of exposures but before the application of any collateral) of all derivatives was approximately 0.80 percent of outstanding notional amount. Applying these percentages to the total notional amount outstanding of $454.1 trillion for the trade types covered by the Survey results in a gross mark-to-market value of $26 trillion and a net credit exposure of $3.8 trillion. The Survey results were based on responses from ISDA’s “primary membership”: 86 firms provided responses on interest rate derivatives, 77 firms provided responses on equity derivatives and 78 firms provided responses on credit derivatives.

ISDA Launches CDS Marketplace


On August 11, 2009, the International Swaps and Derivatives Association, Inc. (“ISDA”) launched CDS MarketplaceSM, a website relating to the credit default swap (“CDS”) market. The website serves many purposes, including educating viewers about the use and function of the CDS market and providing viewers with current market trading and pricing information. The website consists of four sections: (i) About the CDS Market (which provides a description of CDS transactions and the CDS market generally), (ii) Daily Prices (which provides links to prices for and spread changes on various indices and single-name credits), (iii) Exposures & Activity (which provides information about CDS trading volumes and trading activity) and (iv) Market Statistics (which provides information on certain CDS contract terms and links to data sources publishing CDS-related statistics).

CDS MarketplaceSM was developed with the support of a subsidiary of The Depository Trust & Clearing Corporation, Markit and Moody’s Analytics.

Report to the Supervisors of the Major OTC Derivatives Dealers Regarding Centralized CDS Clearing Solutions


On July 13, 2009, an ad hoc group comprised of both buy-side and sell-side market participants in credit default swap (“CDS”) transactions prepared and distributed a report to the supervisors of the major over-the-counter (“OTC”) derivatives dealers entitled, Report to the Supervisors of the Major OTC Derivatives Dealers on the Proposals of Centralized CDS Clearing Solutions for the Segregation and Portability of Customer CDS Positions and Related Margin (the “Report”). READ MORE

Industry Groups Respond to NCOIL Model Legislation for Regulation of Credit Default Swaps


In a letter dated May 22, 2009 to the Chairman of the Task Force on Credit Default Swaps Regulation of the National Conference of Insurance Legislators (“NCOIL”), ISDA and the Securities Industry and Financial Markets Association (“SIFMA”) commented on NCOIL’s proposed model legislation (the “Model Legislation”) to regulate credit default swaps (“CDS”). NCOIL drafted the Model Legislation based on the provisions of Article 69 of the New York Insurance Law relating to financial guaranty insurance. READ MORE

SEC Brings First Insider Trading Case Involving Credit Default Swaps


On May 5, 2009, the Securities and Exchange Commission (the “SEC”) charged a portfolio manager at hedge fund investment advisor Millennium Partners L.P. (“Millennium”) and a bond and credit default swap (“CDS”) salesman at Deutsche Bank Securities Inc. (“DBSI”) with insider trading in CDS. The SEC’s complaint alleges that the DBSI salesman became privy, through his employment at DBSI, to confidential information concerning the restructuring of an upcoming bond issuance by VNU N.V. (“VNU”), a Dutch media holding company, and passed that information on to a Millennium portfolio manager, who traded based on that information. READ MORE