Barney Frank Recommends Only Dealers Trade CDS

Tyler Durden's picture

A "Description of Principles" concept paper by Barney Frank essentially proposes that only dealers are allowed to trade CDS going forward. Barney believes, this is critical to "limiting speculation." Here is what will actually be considered:

1. Limitation on Speculation
Prohibition on any purchase of credit protection using a CDS contracts unless:

  • The party owns the referenced security or (one or more) of the securities in an index of securities.
  • The party has a bona fide economic interest that will be protected by the contract.
  • The party is a bona fide market maker.
  • Regulators will have authority to monitor market activity and impose position limit where necessary.

Here is Barney's tremendous regulatory insight on the matter:

"The fundamental purpose here is to improve the regulation of derivatives so that they continue to perform their important market function but are less likely to contribute to a kind of irresponsibility that can cause a crisis. Nobody here wants to ban them or even severely diminish them as an economic instrument. The Committee on Agriculture represents a lot of end users for whom they are very important. The Committee on Financial Services deals with a lot of the financial institutions. They have an interest that has to be blended. I thank Chairman Peterson and his staff for their cooperation on this effort."

Well, if the Committee on Agriculture believes that Merrill trading exclusively with Goldman and vice versa will promote lower irresponsibility, we can see why they are the Committee on Agirculture.

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Veteran's picture

Damn! Does this negate the banner ad telling me I can "trade US High Grade and Credit Default Swaps Now!"

EQ's picture

Barney looks better in purple.  Batting CDS contracts back and forth between five mega firms is a winning strategy for the next required bailout.

Dixie Normous's picture

This fat pickle licker must be stopped.

spekulatn's picture

OUTFRIGGINSTANDING stuff, Dixie Normous. So is mine.



Anonymous's picture

Rosie coming up on Bloomberg TV 2:19pm edt - with the teaser -- one of the most accurate bears is turning positive

Dixie Normous's picture

That's what you've got to love/hate about financial entertainment tv.

He agreed that the recession maybe be over but he followed it with "does it matter? the recession in 2001 ended November 2001 and the market didn't put in a convincing bottom until the spring of 03."

I bet the headlines will be great.

Anonymous's picture

Makes me want to fucking laugh to keep from crying.

BetterOffDead's picture

Stupid question: If you can only buy protection if you own a deliverable bond, and market makers are not supposed to take on risk (stay flat), do you have to be short the bond in order to sell protection on the other side of that same trade?  I don't think the Committee on Agriculture understands that there are always two sides to a I missing something?

Anonymous's picture

Looks like this is limit applies only to purchasing protection, not on selling protection. That's great in that it allows for the "other side of the trade" and for the ability of dealers to keep flat, but......

institutions that purchased protection on credit (single corporate names, synth corp CDOs, ABS CDOs, CMBS, etc) killed it when the market blew up.

It was the sellers of protection that got hammered.

So what is the purpose of this "concept paper" again ?

BetterOffDead's picture

Wait, wait, I figured it out.  CDS are a form of insurance, so insurance companies should be the ones who write the protection!  Now I feel better...


Another stupid question: "The Committee on Agriculture represents a lot of end users for whom they are very important."


How many farmers trade CDS?

Miles Kendig's picture

It has been speculated that a significant portion of the AIG contracts were/are in fact the natural progression from what were known as "side letters".  Essentially where a firm can paper insurance on a position for regulatory arbritrage with a letter stating that the insurance is never expected to be paid regardless of future conditions.  This is why the AIG backdoor funding trap really sucks.

bruiserND's picture

Smart guy!

Both you & Whalen

agrotera's picture

It just kills me how Barney Franks floats ideas as if the whole world is completely stupid.

Sideletters and SPV's need to be outlawed.

Eric Denallo, Spitzer protege, and former NY insurance superintendent, said one day that of everything he has to say about our capital market meltdown, he is astonished and perplexed how the tools used by Enron to perpetrate such fraud, are still used by the banks (spv's).

Wilderman's picture

Hey, gotta throw some kind of bone to the insurance industry, so they'll take the hit on their cash cow healthcare.

No More Bubbles's picture

I wish Barney would just choke on a plump ballpark "frank" and keel over already.

I'm so sick of that bastard and his utter nonsensical garbage spew.

Disclosure:  I'm not a homophobe.

Gilgamesh's picture

Brings a whole new meaning to Congressional Franking Privilege.

Anonymous's picture

The comments here are disgusting. This posters are depressing. It's like a seedy bar at 1 AM.

Adios Zero hedge

Anonymous's picture

yes, run away from the most informative financial blog on the net because of a few gay jokes. make sure and run back to your local evangelical den to wash away the filthiness with some holy water, then get back to watching another episode of csi: miami.

Anonymous's picture

I know a lot of you have heard the rumor on HuffPo about me stealing Barney's girl away from him.

It's true. She's my little sugar pie now Barney Rubble. Say good-bye forever. Don't even think about calling the Jerry Springer show to try on gettin' her back cause it's not happenin'.

Here is where I met her and you better not try to steal her away from me!

Anonymous's picture

Is that Barney in drag?

bruiserND's picture

Quick  Barney, wipe that joy juice off your chin and tell me what you did with my home equity!!!

Anonymous's picture

How about a requirement of some legit COLLATERAL backing up the CDS?

sellside_pov's picture

I'm not much of a fixed income guy, but the one thing I can never figure out are how CDS are any different from options in the equity world.  The equity options market did not blow itself up like this.  It seems like the problem is just the lack of a central counterparty.

Anonymous's picture

So...buying protection is verboten, but selling is OK? and dealers are allowed to buy because they're customers selling zillions of protection in vanilla or leveraged form, in many cases much more than they'd actually be good for (AIG being the most obvious example but pretty much the entire German landesbank system and many other insurers and reinsurers would find themselves in the same position should there be a further increase in corporate defaults) is a big part of why we've ended up here. Barney Frank thinks it's OK to go long credit in leveraged form, with small upside and enormous downside, but being short with definable downside (spreads are floored at zero) and massive upside, which seems like a natural, safer angle for clients, is not. Nice. Forget short-selling bans in equities, we'll be lucky if it's legal to sell (any long holding you have) soon...and then why not pass a law that forces all of us to buy stocks every month whether we like it or not? (only insiders and...dealers would be allowed to sell, natch).

aus_punter's picture

just ban them altogether and list credit futures on exchange...... whats so hard about that ?

aus_punter's picture

just ban them altogether and list credit futures on exchange...... whats so hard about that ?

Anonymous's picture

WTF is a credit future you moron?

@#20427 - you are spot on. The reason for these implosions wasn't because banks and AIG bought protection in the CDS market, it was because they were selling protection, effectively "going long" the credit by taking the view that they would not default. Barney Frank's measure is hitting the wrong side of the trade.

Anonymous's picture

People need to understand how a CDS works. There are two sides to an agreement. Each party agrees to a certain amount of "par" to be covered in the swap. The buy side pays a semi-annual coupon payment. The seller receives this payment. If the underlying bond defaults, then the buyer of protection delivers the bond to the seller, and the seller pays the "par" covered in the CDS contract.

If you buy protection you are short the name. If it defaults, you make money (you get paid the full par of the defaulted bond by your counterparty). If you sell protection, you are long the name, you do not think the bond will default so you happily accept the payments from the buyer.

Most banks were doubling down on ABS and CDOs by not only owning them, but also selling protection via CDS, so they got hit double when the shit hit the fan. The bonds defaulted so they lost there, and then the CDS contracts also had to be fulfilled.