Insider Trading of Credit Derivatives Won't Be `Tolerated'

Discussion in 'Financial Futures' started by Joma, Dec 13, 2006.

  1. Joma


    Finally acting against malpractice...

    [ Bloomberg ]

    A group of 12 securities industry associations issued a joint statement today saying the use of material nonpublic information when trading credit derivatives won't be ``tolerated.''

    The statement from the International Swaps and Derivatives Association, Securities Industry and Financial Market Association and the other groups follows what some investors and traders have called suspicious trading in credit derivatives before announcements of takeovers and other events that can change the perceptions of a borrower's ability to meet debt payments.

    The groups said they have adequate procedures in place to guard against improper trading in the unregulated market for credit derivatives and other markets including loans that are privately negotiated between banks and investors and not traded over an exchange. They will ``educate'' and ``inform'' members about how to handle information that hasn't been publicly disclosed that could influence markets, they said.

    Having the ``associations come together is a significant step in promoting fair play, and should alleviate concerns that may have existed,'' said Greg Zerzan, general counsel and head of Global public policy at New York-based ISDA in an interview. ``Even the perception of misuse can be damaging to the industry.''

    Harrah's, HCA

    Speculation that investors were trading on inside information in the credit-default swap market began to heat up when prices for contracts based on Las Vegas-based Harrah's Entertainment Inc. and Nashville, Tennessee-based HCA Inc. rose ahead of announcements or news reports that those companies were takeover targets. Credit-default swaps are financial instruments based on bonds and loans that are used to make bets on a company's ability to repay debt.

    Contracts based on owner Sabre Holdings Corp. of Southlake Texas, last week jumped 13 percent before a New York Times report that three teams of private-equity bidders were seeking to buy the company. Sabre yesterday agreed to be acquired by Texas Pacific Group and Silver Lake Partners for about $4.4 billion.

    ``This is going to become a more significant regulatory issue over this next year,'' Deutsche Bank AG credit strategist John Tierney said of the insider trading suspicions. He made the comments at an industry forum yesterday in New York.

    Independent Study

    A study in October by Credit Derivatives Research LLC found that credit-default swaps based on the bonds of 30 takeover targets, including four of the five biggest LBOs of 2006, rose before deals were announced or news reports said transactions were likely. The independent research firm is based in New York.

    The fluctuations in credit-default swaps based on the bonds of Austin, Texas-based Freescale Semiconductor Inc., Sara Lee Corp. of Chicago and San Jose, California-based Knight Ridder Inc. were highlighted by the report. The U.K.'s Financial Services Authority said in June it would monitor unusual trading on concern inside information is leaking from banks or securities firms privy to details about takeover talks.

    ``Allegations of such misconduct have the potential to erode confidence in the integrity -- and thus the liquidity and efficiency -- of the securities and derivatives markets on which our members rely,'' the groups said in the statement today.

    The statement wasn't prompted by evidence of insider trading in the credit-default swap market, said Randy Snook, senior managing director of the Securities Industry and Financial Markets Association.

    Growing Market

    Credit-default swaps, the fastest growing derivatives market, have become the best gauge of shifts in credit quality. The market doubled the past year to $26 trillion, ISDA said in September. Derivatives are financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in the weather or interest rates.

    The statement also wasn't issued because of increased regulatory scrutiny, said Elliot Ganz, general counsel for the Loan Syndications and Trading Association, one of the 12 groups.

    Ganz said the statement reinforces guidelines set earlier this year by the LSTA to prevent lenders and investors with access to potentially market-moving information from trying to profit from it. Hedge funds and other institutional investors that invest in loans, and may have access to such information, also trade in derivatives based on those loans as well as other derivatives and securities, Ganz said.

    `High Importance'

    ``It's an issue of high importance to the market,'' Ganz said. ``Obviously our market does better when people believe in its transparency and integrity.''

    There were 242 institutional investors such as hedge funds in the leveraged loan market in the third quarter, compared with less than 100 in 2002, according to Standard & Poor's. Hedge funds that invest in leveraged loans may also have holdings in the bonds and shares of the same companies. Hedge funds are private pools of capital that allow portfolio managers to participate substantially in the gains of the money invested.

    ``The loan market continues to grow and the type and variety of participants also grows,'' Snook said. ``It's not bank-only buyers any more in the loan markets. There are investment advisers, hedge funds and those who manage structured transactions now.''
  2. I would be asjamed to say this outloud. Do they really think that we are all born yesterday???