The US$28 trillion credit default swaps market came under investigation on Friday by the EU, adding to official pressures bearing down on a huge and opaque business that is widely blamed for aggravating the recent banking and eurozone debt crises.
The European Commission, the EU’s executive body, said it is probing whether major investment banks, including Goldman Sachs and JP Morgan, colluded in their operations in a market that is already under scrutiny by US authorities and being subjected to broad, new regulations.
Credit default swaps, or CDS, are derivatives that let a buyer transfer loan default risk to a seller, making them a kind of insurance against default. CDS can also be bought by speculators without direct interest in the debts involved.
CDS played a central role in the near collapse of American Insurance Group Inc in 2008, which led to a massive US taxpayer bailout of the former insurance giant. The contracts have also been at the heart of the debt crisis engulfing some weaker EU states.
The EU probe comes as the 27-nation bloc struggles, along with the US, to complete a government crackdown under way for months now on the broad, US$600 trillion off-exchange derivatives markets, including CDS.
“CDS play a useful role for financial markets and for the economy,” said the EU’s anti-trust commissioner, Joaquin Almunia, in a statement announcing the two-track inquiry.
“Recent developments have shown, however, that the trading of this asset class suffers a number of inefficiencies that cannot be solved through regulation alone,” he said.
Almunia added that a lack of transparency could lead to abusive behavior and that he hoped the probe would improve financial markets and aid economic recovery.
PREVIOUS PROBE
The US Department of Justice in 2009 launched an inquiry into anti-competitive practices in the trading, clearing and pricing of CDS in the US. A spokeswoman for the department declined to comment on the EU move.
Unlike other derivatives, such as grain or metal futures, credit derivatives are risk transfers.
“It’s a banking function that’s been converted by this small group of banks into a trading instrument,” said Karen Shaw-Petrou, managing director at consulting firm Federal Financial Analytics.
“The problem is no one knows what anything is worth unless or until the entity against which the CDS is placed defaults ... That’s what makes it very opaque,” she said.
In Europe, CDS moved to center stage last year as Greece grappled with higher borrowing costs, blaming the move on speculators raising default insurance costs.
The European Commission, which regulates competition in the EU, said it would investigate whether 16 investment banks had colluded or abused a dominant market position.
BOOKKEEPING
The opaque CDS market, where industry players say the only record of some multimillion-euro deals is just a fax, has frustrated politicians who have struggled to understand it because there are few central records of trading.
“It is not a transparent market,” Shaw-Petrou said. “It’s a liquid market ... but there’s no real proof of value other than moment-to-moment exchanges that are then impossible to verify because it’s not a public exchange.”
The probe could hit banks’ bottom lines as the EU can fine companies up to 10 percent of revenues and has handed out penalties as big as 1 billion euros (US$1.5 billion).
The European Commission said it would also investigate any collusion by Markit, which provides prices and whose shareholders are the 16 banks. Markit denied any inappropriate conduct.
The 16 banks being examined are: JP Morgan, Bank of America Merrill Lynch, Barclays, BNP Paribas, Citigroup, Commerzbank, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, Morgan Stanley, Royal Bank of Scotland, UBS, Wells Fargo Bank/Wachovia, Credit Agricole and Societe Generale.
NOT JUSTIFIED: The bank’s governor said there would only be a rate cut if inflation falls below 1.5% and economic conditions deteriorate, which have not been detected The central bank yesterday kept its key interest rates unchanged for a fifth consecutive quarter, aligning with market expectations, while slightly lowering its inflation outlook amid signs of cooling price pressures. The move came after the US Federal Reserve held rates steady overnight, despite pressure from US President Donald Trump to cut borrowing costs. Central bank board members unanimously voted to maintain the discount rate at 2 percent, the secured loan rate at 2.375 percent and the overnight lending rate at 4.25 percent. “We consider the policy decision appropriate, although it suggests tightening leaning after factoring in slackening inflation and stable GDP growth,”
DIVIDED VIEWS: Although the Fed agreed on holding rates steady, some officials see no rate cuts for this year, while 10 policymakers foresee two or more cuts There are a lot of unknowns about the outlook for the economy and interest rates, but US Federal Reserve Chair Jerome Powell signaled at least one thing seems certain: Higher prices are coming. Fed policymakers voted unanimously to hold interest rates steady at a range of 4.25 percent to 4.50 percent for a fourth straight meeting on Wednesday, as they await clarity on whether tariffs would leave a one-time or more lasting mark on inflation. Powell said it is still unclear how much of the bill would fall on the shoulders of consumers, but he expects to learn more about tariffs
Greek tourism student Katerina quit within a month of starting work at a five-star hotel in Halkidiki, one of the country’s top destinations, because she said conditions were so dire. Beyond the bad pay, the 22-year-old said that her working and living conditions were “miserable and unacceptable.” Millions holiday in Greece every year, but its vital tourism industry is finding it harder and harder to recruit Greeks to look after them. “I was asked to work in any department of the hotel where there was a need, from service to cleaning,” said Katerina, a tourism and marketing student, who would
i Gasoline and diesel prices at fuel stations are this week to rise NT$0.1 per liter, as tensions in the Middle East pushed crude oil prices higher last week, CPC Corp, Taiwan (台灣中油) and Formosa Petrochemical Corp (台塑石化) said yesterday. International crude oil prices last week rose for the third consecutive week due to an escalating conflict between Israel and Iran, as the market is concerned that the situation in the Middle East might affect crude oil supply, CPC and Formosa said in separate statements. Front-month Brent crude oil futures — the international oil benchmark — rose 3.75 percent to settle at US$77.01
RSS