February 25, 2010 / 9:21 PM / 10 years ago

SEC examines destabilizing effects of CDS

WASHINGTON (Reuters) - Securities regulators said on Thursday they are examining the potential abuses and destabilizing effects of credit default swaps, a financial instrument that can be used to speculate on an issuer’s credit worthiness.

The Securities and Exchange Commission comments come after Federal Reserve Chairman Ben Bernanke said regulators were looking at how Goldman Sachs (GS.N) and other Wall Street companies helped Greece arrange derivative deals.[nN25251885]

The SEC would not confirm or deny it was investigating Goldman’s role in Greece.

“As an agency, we have been examining potential abuses and destabilizing effects related to the use of credit default swaps and other opaque financial products and practices,” SEC spokesman John Nester said.

Goldman had no comment.

It is unclear what regulators are examining regarding Goldman’s dealings with Greece. Bernanke did not specify.

The SEC has said it has more than 50 probes involving credit default swaps, collateralized debt obligations and other derivatives-based instruments.

The SEC has already expanded some of its insider trading investigations to examine derivatives and credit default swaps.

Used to insure against the default of debt issuers, credit default swaps were blamed for exacerbating the financial crisis by spreading losses from bets on risky mortgages and other debt.

Because swaps and other over-the-counter derivatives are not traded on a central exchange, regulators cannot monitor their activity for any potential wrongdoing.

Congress is working on legislation to shed light on the $450 trillion private derivatives market. This legislation is currently stalled in the Senate.

The SEC said any derivatives legislation should ensure that securities-based swaps are regulated as strongly as the security that underlies the swap.

The agency also said Congress needs to give it the tools needed to police the markets and shed light on the opaque market.

Reporting by Rachelle Younglai; editing by Carol Bishopric

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