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SEC Begging For Real Time CDS Pricing Terminal
Securities Industries News discloses that the SEC has requested it be granted authority to have "direct access to real-time data" on CDS and other derivatives. One wonders how the SEC was operating up until this point without this information. Yet of course, this is merely just another pretext for the SEC to deflect allegations about its utter uselessness, with claims that "lack of such information hampered its efforts to investigate potential fraud and market manipulation in the over-the-counter (OTC) derivatives markets during last fall’s financial crisis." Well, duh. The SEC is finally realizing that the credit market is, oh, about 10 times bigger than equities, and that virtually everyone trades CDS now over cash products. CDS is, incidentally, also where all the insider trading occurs these days, a fact abused all too well by CDS traders, who have known about the SEC's inability to closely track the action in the credit market. This is also why if the SEC were to look at CDS buying action of LBOs names in 2006/2007 it may actually find some amusing results. In the meantime, the SEC should spend $10,000 a year and get a MarkIt subscription.
From Securities Industry
The SEC’s enforcement actions in investigating market manipulation in OTC derivatives “were seriously complicated by the lack of a mechanism for promptly obtaining critical information – who traded, how much, and when – that is complete and accurate,” said Henry Hu, the director of the SEC’s new division of risk, strategy and financial innovation, in written testimony to the House Financial Services Committee.
The SEC’s enforcement actions in investigating market manipulation in OTC derivatives “were seriously complicated by the lack of a mechanism for promptly obtaining critical information – who traded, how much, and when – that is complete and accurate,” said Henry Hu, the director of the SEC’s new division of risk, strategy and financial innovation, in written testimony to the House Financial Services Committee.Hu testified that “data on securities-related OTC derivative transactions were not readily available, and needed to be reconstructed manually.” He asked Congress to expand the SEC’s inspection authority over trade data repositories and clearinghouses for derivatives.
The comments represented a rebuke to industry efforts aimed thus far at making more information on CDS and other OTC derivatives data more readily available.
Yet it is a little odd that the SEC and the DTCC, which is the core CDS trade repository, are so unable to exchange phone numbers. After all, the DTCC is an organization for the benefit of everyone, or so the tag line goes.
The main collector of information on CDS contracts has been the Depository Trust and Clearing Corporation (DTCC), which could be required to supply it in real-time to the SEC.
The DTCC collects data on swaps contracts and places in its Trade Information Warehouse (TIW). Last Nov. 4, DTCC began publishing weekly aggregate data for some of the contracts placed by dealers in the database.
The TIW is a service offering of DerivServ, DTCC’s confirmation and affirmation subsidiary, which is not regulated.
DTCC says its CDS data proved critical in calming the markets last year when Lehman Brothers declared bankruptcy. While market analysts estimated potential net liabilities on CDS on outstanding Lehman obligations could top $400 billion, DTCC released data from the warehouse showing the amount would be less than $6 billion. Ultimately, $5.2 billion was transferred among affected Lehman counterparties, DTCC said.
The good thing to come out of all this will be a public means to price CDS intraday, which, ironically, may have a rather adverse impact on firms like the above mentioned MarkIt, whose primary business is providing just that.
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It just keeps on getting better and better.
You just can't make this stuff up. No one would believe you if you described a fictional regulatory organization such as the SEC in your new who-done-it novel.
Get rid of the SEC and crowdsource enforcement.
Take privacy out of the securities markets. You own a security or a derivative, it needs to be publicly registered to you. Make the ownership and transactions transparent. Then let the public put 2+2 together and sue as private AG's. Give them standing via legislation.
Transparency is the only answer. Take the market out of the shadows, and stop relying on a blind agency to probe in the dark.
The SEC can't even spell CDS.
Even if you spot them the C and the S.
The solution could not be simpler....
Let's put it this way....
I know that the BATS model can be applied across all asset categories TODAY.....
And this solves it....
Regulations....SS....margin.....all of it.....
Especially simplifying the ability to regulate....
If DTCC can provide accurate credit exposure numbers ($6 billion for Lehman instead of $400 billion), wouldn't those numbers go a long way toward regulating 'too big to fail' banks? We have a lot of the information to answer the question, but the Fed doesn't want to use it.
LBO names you say? They could do worse than start with the VNU subs deliverable announcement...
Fuck this "CDS pricing" bullshit. A "CDS" should be illegal. Period. Nullify every last damn one of them. Null and void.
A "CDS" is nothing but an insurance policy. Insurance is (normally) highly regulated for a reason: it can be used to bet on events that that we don't want to encourage people trying to make happen.
But what makes the "CDS" a wholly piece-of-shit instrument is this: "The buyer of a CDS does not need to own the underlying security or other form of credit exposure; in fact the buyer does not even have to suffer a loss from the default event."
Yes, that's right: it's like being able to take out a life insurance plan on someone you have no relationship with. Just think of the many ways this can be abused. Oh wait, you don't have to: Just look back at the CDS bets that were paid out at 100 cents on the dollar to the very same banks that arguably caused the insured entities to fail.
The fact that the CDS market remains as unregulated as it is should be prima facie evidence that the regulators are completely captured by industry, and should all be sent back home to engage in chicken-fucking. Mother fuckers.
The "if only we had a basic tool" does not work as an excuse for the primary federal law enforcement agency for the worlds largest markets. Especially with the FBI, IRS, USSS and CFTC completely missing in action with respect to policing or investigating major institutions or those that lead them or form major investor accounts. In fact, attempting to use such an "out" does nothing more than cement the agencies hard won reputation as the lead federal law enforcement agency for capital ineptitude in the pursuit of the illusion that there is a cop on the beat on Wall Street.
The whole of the institutional knowledge of the SEC could not figure out how to track a C note at the Mustang Ranch, or what it could be used for if they had a whole year and a 1 million expense account to figure it out.
I am sure that Satyajit Das would have something to say about the DTCC estimate of CDS loses related to Lehman.
This begs the question. What on earth would the folks at the SEC do with a MarkiIt terminal besides look at all the color options?
It's time to dismantle this goddamned USELESS pos agency.
Without question GG.
No no, giving them that would be government meddling. See, if they don't have this access, then there won't be the creation of the moral hazard of taking outsized risks...
I still think everyone is getting lost in the details. These things are confusing for a reason - so you don't realize where the money is coming from and going to. The reason these things work (to make loads of money) is because they ARE opaque. Markit IS the banks. ISDA is the banks.
If you get any transparency into the system, you lose EVERYTHING. You can't sell the pig if the cat is out of the bag.
But I hear they are getting to the bottom of the unusual activity in Teldar Paper...........
Posters have a great point....
Make securities simple....boiler plate....
No derivatives of the CDS type period....
Here is the list....
Stocks
Bonds
Commodities
4:1 margin both intra-day or overnight....
No other securities....
All direct access electronic and defragmented....
No internal matching....
No dark pools....
No tax free bonds....
No taxes of any kind on any security....
Boilerplate entry....
Boilerplate ratings.....
No account minimum or maximum....
Size restrictions....
No uptick rule or locate....SS supply = float....
First come....first served....
Cost....20 cents per 100 units....
That's it....worldwide....
Information....fact based ....wiki format....
Real-time data? God are they stupid. Most pricing, at least in the CDS market, is blasted out via Bloomberg messages. On scraps of digital paper, more or less. Is this anyway to run a $30T+ market? The regulators are so far behind they will never catch up. Sort of like the RAF vs the Luftwaffe by 1937.
Wait. This is some kind of pre-Halloween post, right? Scaring us, hahaha, right? Very funny, guys, now tell us the truth. They have an old Quotron machine and have been getting "real time" (woohoo!) quotes on everything their regulatory hearts desire. Sure they are. Of course they are. You was just skeerin us.
Hopefully everyone keeps in mind the fact that 40+% of the trades in the CDS market are naked...and Frank conviently left that out of his "reform" proposal.
I think Henry Hsu could be the man to shape up the SEC and put some controls on naked CDS. He has written extensively about the topic and the SEC is lucky to have him on board.
how truly pathetic.... they almost seem to be argiung for their own euthenasia
I'm glad you're finally covering this, although I think you're focusing on the small picture rather than the big one.
DTCC sees virtually every CDS trade, therefore it's repository is priceless to regulators, legislators and market participants.
As is pointed out in the article the warehouse resides in an unregulated entity, so I suspect DTCC (and its clients) are under no obligation or pressure to provide their proprietary information that would enable regulators and legislators to review information on systemic exposure before going imposing new regulations and market structures (clearinghouses) for example.
If, as I assume, DTCC is not required to share the info (hence SECs request to congress) it can be pressured to provide it by demands from the blogospher and the press.
Making noise about flash was effective. Why not make some noise about this. Should DTCC be allowed to hold a monopoly on this critical dataset when its public policy value is so extraordinarily high?
This story is orders of magnitute more significant than flash.
Oops, once again I reacted to the heat, rather than the meat in your screed.
You need to read http://www.dtcc.com/news/press/releases/2009/warehouse_trust_company.php
to see that DTCC has applied (in May '09) to put TIW in a trust company regulated by the FED. One of the stated goals is to provide regulators (presumably including the SEC) with access to the data.
It doesn't hurt for the SEC to raise the request to Congress to ensure it does get access, but it seems this process is already in motion.
So this current move sounds more like a turf battle (SEC will be dependent on the Fed if this goes through) rather than just a dumb ass SEC oversight. Or not , it could very well be a dumb ass oversight.
No one trading wants transparency because they would be taxed. Simple as that. Who wants to pay taxes.