SEC head calls for transparency on credit default swaps (CDS)

October 19, 2008 by · Leave a Comment
Filed under: Economic News 

Its great to know that is takes a crisis with global implications to ruin many economies for us to finally to demand disclosure on these huge positions using credit default swaps (CDS).  The SEC head, Chris Cox even admitted that the $55 trillion credit defaults market is more than the GNP of all the world’s nations combined, and that credit default swaps “play an important role in the smooth functioning of capital markets.”  How can we even talk about this as it is a walk in the part.  I believe this is the central reason for the freezing in the global credit markets.  No one would want to deal with counter-parties that have this kind of exposure?  It will be very interesting in how the various government bodies decide to deal with this problem and the precedence it will set for decades to come.

News Release:

SEC Chairman Christopher Cox has called on Congress to pass legislation that would make so-called credit default swaps more transparent, including requiring that dealers in over-the-counter swaps publicly report their trades and the trades’ value.

Writing in Sunday’s New York Times, Cox noted that the $55 trillion credit defaults market is more than the GNP of all the world’s nations combined, and that credit default swaps “play an important role in the smooth functioning of capital markets.”

But, he said, “our markets function best when they are highly transparent,” while credit default swaps have “operated in the shadows,” with “no public discourse nor any legal requirement for these contracts to be reported to the Securities and Exchange Commission or any other agency.”

Having been bought and sold widely and in many cases anonymously,” trapping large financial institutions “in a web of transactions,” the swaps market has left government regulators with “no way to assess how much risk is in the system.”

“All investors … are paying a price today for the lack of oversight” of credit default swaps, which Cox describes as being “like insurance contracts on bonds and any other assets that are meant to pay off if those assets default,” he stated.

Noting the market for credit default swaps has doubled in just the past two years alone and that “private counterparty discipline has proven inadequate,” Cox proffers several suggestions.

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