WASHINGTON (Reuters) - Information on credit default swap trades and dealers’ positions would help securities regulators enforce anti-fraud and anti-manipulation rules, a top U.S. Securities and Exchange Commission official said on Wednesday.
The SEC and other policymakers have called for oversight of the fast-growing $55 trillion credit default swap (CDS) market, which has been blamed for contributing to the global financial crisis.
“Improving market infrastructure and the ability to monitor the CDS market, for example by establishing a (central counterparty), would be an important first step in reducing systemic and operational risks in the market,” said Erik Sirri, the SEC’s director of trading and markets, in testimony to be delivered to the House Agriculture Committee on Wednesday.
The Commodity Futures Trading Commission (CFTC) is calling for a centralized derivative clearinghouse to reduce the risk posed by CDS.
Currently the opaque market is not regulated. The swaps are not traded on exchanges and there is no requirement to keep records of who traded how much and when.
The swaps, used to protect or insure against the risk that a borrower will default on debt, are used by banks, hedge funds and others. They can pose systemic risks because the secretive nature of the market makes it impossible to know the size of a counterparty’s exposures and where they are distributed.
The SEC’s current authority over the over-the-counter credit default swaps is limited to enforcing anti-fraud prohibitions such as insider trading.
“The tools necessary to oversee this market effectively and efficiently do not exist,” Sirri said.
Reporting by Rachelle Younglai, editing by Gerald E. McCormick