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The SEC, CFTC and UK Financial Conduct Authority urged market participants to address the risks posed by "opportunistic strategies" (e.g., "manufactured credit events") in the credit derivatives markets.
The joint statement follows a previously issued statement made in June 2019 in which the regulators announced their intention to target manufactured credit events in the credit derivatives markets. The CFTC had warned that manufacturing CDS events in order to trigger credit default swaps ("CDSs") may constitute manipulation. Participants in the CDS market and ISDA have identified narrowly tailored defaults that could negatively impact the reliability of the CDS market.
Per the updated joint statement, the agencies advised market participants to consider ISDA's proposed protocol for "narrowly tailored credit events" ("NTCEs"). Under the proposal, NTCEs are defined as arrangements with an issuer that cause a credit event leading to a credit default swap settlement while minimizing the impact on the issuer. Specifically, the agencies urged market participants to:
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assess how the proposed ISDA protocol may help mitigate risks; and
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evaluate whether trading with counterparties that do not adhere to the proposed ISDA protocol may compromise their operations.
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