Posted by: tristar3research | March 14, 2009

Credit Default Swaps (CDS) Get SEC Exemption from Capital Compliance Rule- WHAT!?

Funny how little news items get buried in the Federal Register and never covered by the MainStreamMedia (MSM). These baseball cards are at the core of the failure of Bear Stearns, Freddie Mac and Fannie Mae. Here’s a handy ruling to make the key Central Clearinghouse of Credit Default Swaps (CDS) exempt from SEC capital compliance because of  “concerns (relating to) the systemic risk posed by CDS, highlighted by the possible inability of parties to meet their obligations as counterparties and the potential resulting adverse effects on other markets and the financial system.” Time explained last year why we should care.

Alright, but this isn’t a very big market anyway, right? $58T!#$

Quite a paper trail, a lot of good it did us, as Fortune warned.

Yeah, securities legalspeak aside, here’s the bottom line:

Nationalization is still on the table:

Nationalize Us! But Leave Bonuses Alone!
Don't Nationalize Us! Yet...
"In addition to the potential systemic risks that CDS pose to financial stability, we are concerned about other potential risks in this market, including operational risks, risks relating to manipulation and fraud, and regulatory arbitrage risks." (SEC, 13 March 2009)

Okay, so the request came from the Chicago Mercantile Exchange (CME) and Citadel Investments.

As previously “predicted” by Wall Street lawyers, the exemption would be granted…

[Federal Register: March 12, 2009 (Volume 74, Number 47)]
[Notices]
[Page 10791-10800]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr12mr09-115]                         

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59527; File No. S7-05-09]

Order Granting Temporary Exemptions Under the Securities Exchange
Act of 1934 in Connection With Request on Behalf of ICE U.S. Trust LLC
Related to Central Clearing of Credit Default Swaps, and Request for
Comments

March 6, 2009.
I. Introduction
    In response to the recent turmoil in the financial markets, the
Securities and Exchange Commission (``Commission'') has taken multiple
actions to protect investors and ensure the integrity of the nation's
securities markets.\1\ Today the Commission is taking further action
designed to address concerns related to the market in credit default
swaps (``CDS''). The over-the-counter (``OTC'') market for CDS has been
a source of concerns to us and other financial regulators. These
concerns include the systemic risk posed by CDS, highlighted by the
possible inability of parties to meet their obligations as
counterparties and the potential resulting adverse effects on other
markets and the financial system.\2\ Recent credit market events have
demonstrated the seriousness of these risks in a CDS market operating
without meaningful regulation, transparency,\3\ or central
counterparties (``CCPs'').\4\ These events have emphasized the need for
CCPs as mechanisms to help control such risks.\5\ A CCP for CDS could
be an important step in reducing the counterparty risks inherent in the
CDS market, and thereby help mitigate potential systemic impacts. In
November 2008, the President's Working Group on Financial Markets
stated that the implementation of a CCP for CDS was a top priority \6\
and, in furtherance of this recommendation, the Commission, the FRB and
the Commodity Futures Trading Commission (``CFTC'') signed a Memorandum
of Understanding \7\ that establishes a framework for consultation and
information sharing on issues related to CCPs for CDS. Given the
continued uncertainty in this market, taking action to help foster the
prompt development of CCPs, including granting conditional exemptions
from certain provisions of the Federal securities laws, is in the
public interest.
---------------------------------------------------------------------------
Weapons of Capital Destruction
Weapons of Capital Destruction
\1\ A nonexclusive list of the Commission's actions to stabilize financial markets during this credit crisis include: adopting a package of measures to strengthen investor protections against naked short selling, including rules requiring a hard T+3 close-out, eliminating the options market maker exception of Regulation SHO, and expressly targeting fraud in short selling trans- actions (See Securities Exchange Act Release No.58572 (September 17, 2008), 73 FR 54875 (Sep- tember 23, 2008)); proposing rules to strengthen the regu- lation of credit rating agencies and making the limits and purposes of credit ratings clearer to investors (See Securities Exchange Act Release No. 57967 (June 16, 2008), 73 FR 36212 (June 25, 2008); entering into a Memorandum of Understanding with the Board of Governors of the F ederal Reserve System ("FRB") to make sure key Federal financial regulators share information and coordinate regulatory activities in important areas of common interest. http://www.sec.gov/news/press/2008/2008-134_mou.pdf). \2\ In addition to the potential systemic risks that CDS pose to financial stability, we are concerned about other potential risks in this market, including operational risks, risks relating to manipulation and fraud, and regulatory arbitrage risks. \3\ See Policy Objectives for the OTC Derivatives Market, The President's Working Group on Financial Markets, November 14, 2008, available at http://www.ustreas.gov/press/releases/reports/ policyobjectives.pdf (``Public reporting of prices, trading volumes and aggregate open interest should be required to increase market transparency for participants and the public.''). \4\ See The Role of Credit Derivatives in the U.S. Economy Before the H. Agric. Comm., 110th Cong. (2008) (Statement of Erik Sirri, Director of the Division of Trading and Markets, Commission). \5\ See id. \6\ See Policy Objectives for the OTC Derivatives Market, The President's Working Group on Financial Markets (November 14, 2008), http://www.ustreas.gov/press/releases/reports/policyobjectives.pdf. See also Policy Statement on Financial Market Developments, The President's Working Group on Financial Markets (March 13, 2008), http://www.treas.gov/press/releases/reports/ pwgpolicystatemktturmoil_03122008.pdf; Progress Update on March Policy Statement on Financial Market Developments, The President's Working Group on Financial Markets (October 2008), http:// www.treas.gov/press/releases/reports/q4progress%20update.pdf. \7\ See Memorandum of Understanding Between the Board of Governors of the Federal Reserve System, the U.S. Commodity Futures Trading Commission and the U.S. Securities and Exchange Commission Regarding Central Counterparties for Credit Default Swaps (November 14, 2008), http://www.treas.gov/press/releases/reports/finalmou.pdf.
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