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The SEC, CFTC and UK Financial Conduct Authority intend to target "opportunistic strategies" (e.g., "manufactured credit events") in the credit derivatives markets, according to a Joint Statement.
The agencies agreed to work together to address market manipulation schemes that threaten the "integrity, confidence and reputation of the credit derivatives market." The CFTC previously identified the risk that intentional or "manufactured" events designed to trigger credit default swaps ("CDSs") pose to the integrity of the markets. Participants in the CDS market and ISDA have also identified narrowly tailored defaults (designed to result in CDS payments that do not reflect the creditworthiness of the underlying corporate borrower) that could negatively impact the reliability of the CDS market.
Commentary / Assia Damianova
ISDA has published a proposed amendment to its Credit Derivatives Definitions. Given that CDS have a significant role in hedging credit risk, the regulatory scrutiny may help to assure market participants that the CDS market remains transparent, fair and efficient.
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