Saturday, April 30, 2011

European Regulators wants a Justification on Credit Default Swaps

The derivative that insures you against another person, and makes you sure that you will receive your money when the other person defaults, is under default by the European regulators. For some reasons, i like that they are being investigated, after knowing that those taxpayer money was soured into AIG, because it ad to pay those CDS to Goldman and other clients, that had insured or had short positions on their own debt and trades, thus, whatever the scenario, there is a likelihood that you will receive your money back. And this is also the main reason why many insurance companies and clearing hanks went busted, and with this also the overall financial markets dynamics was poised, which in return resulted in the financial crisis as we have all witnessed 3 years back.

So there are two investigations that have been put up by the European Regulators.

The First focuses on 16 banks in total, that work with a data provider called the Markit Group, based in London, designing pricing procedures and indices related to these swaps. Many of the banks also hold stakes in Markit. It is believed that Markit, had some clauses in their agreement and licenses, which resulted in loss of competition and made this accessible to clients that had an edge on the other players in the market. Thus in relation to the commissions comments, Markit officials said that it “has no exclusive arrangements with any data provider and makes its data and related products widely available to global market participants.”

The next set of investigation involves 9 banks, that play a major role in a procedure called clearing that regulators in the United States and Europe have promoted for several years as a better way to manage the risks posed by derivatives.

In return for partnering with the Intercontinental Exchange, a publicly traded company, the banks got a favorable deal with ICE that persists today. Not only did they get a major say in ICE’s rules on derivatives, the banks also share in ICE’s profits from clearing and enjoy a cap on the fees they pay for clearing.

The European Commission said the deal between ICE and the nine banks might be unfair to other players in the market. In particular, the commission criticized the cap on clearing fees. The banks are not obligated to pass on the benefits of the caps to their customers and could use part of their savings to undercut bids from new competitors.

The banks named in the ICE clearing investigation are JPMorgan, Bank of America, Barclays, Citigroup, Crédit Suisse, Deutsche Bank, Goldman Sachs, Morgan Stanley and UBS. In addition to those nine, the Markit inquiry also includes Wells Fargo, BNP Paribas, Commerzbank, HSBC, Royal Bank of Scotland, Crédit Agricole and Société Générale. 

No wonder all of these banks have already under spotlight for misleading clients and causing the severe crisis that even made Greece a victim or the game.

I should also mention that in 2010, European Regulators did focused on understand what these CDS are and who operates in all of these markets, the major players and the banks involved in the production of these weapons of mass destruction. So, we can think on what new findings can be brought now in relation to these derivatives, that now constitute more than $600 trillion in market cap
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