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Regulation of Credit Default Swaps


Credit default swaps are important to corporations directly because they allow companies to protect themselves against the risk that partners or suppliers may go into bankruptcy, according to John O'Neill, manager of CDS at Liffe, NYSE Euronext. Chairman of the Senate Agriculture Committee, Sen Tom Harkin's Derivatives Trading and Integrity Act (S. 272) stipulates that all futures contracts (CDS are futures) must trade on a designated contract market or a derivatives transaction execution facility. Chances are strong in 2009 for passage of the Harkin legislation as well as for a bill currently in draft form from House Agriculture Committee Chairman Collin Peterson. The draft prohibits credit default swap trading in cases where investors don't own the underlying bonds.

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       GOVERNMENT                                                     Designing Effective Controls
                                                                      I read with great interest Curt Verschoor’s ethics article in
                                                                      the January issue of Strategic Finance. As we see a new
                                                                      administration take office there will be a significant need

     Regulation of Credit                                             for re-regulation of practically every federal agency. The
                                                                      shortcomings of the financial industry are being replicated
     Default Swaps                                                    in other aspects of our daily lives. One has only to look at
     By Stephen Barlas, Editor                                        the tomato and peanut industries to see how the FDA’s mis-
                                                                      management fails to protect the American public. FEMA’s
     Will new federal regulation of credit default swaps              response to Katrina was symptomatic of a dismantling of
     (CDS) affect corporate finance? Considering the                  regulation and government effectiveness that began at the
     important role CDS have come to play in protecting               top. Professional accountants can and must help with
     the risks that banks feel they take on when they buy             designing effective controls which help ensure our govern-
     corporate bonds, the answer is “Heck, yes!” CDS are              ment runs both effectively and efficiently. This will certainly
     important to corporations directly, too, because they            be critical as we straighten out the mess in the financial
     allow companies to protect themselves against the risk           industry. As Curt’s article indicates, the genesis of the prob-
     that partners or suppliers may go into bankruptcy,
                                                                      lem started in the early 1980s and accelerated in
     according to John O’Neill, manager of CDS at Liffe,
                                                                      2001….As his column points out, there were many ethical
     NYSE Euronext. Bills have already been introduced in
                                                                      lapses tracing back to a culture of greed. However, there
     formal and draft forms requiring CDS to be traded on
                                                                      was also an attack on the fundamental systems we use to
     a national exchange, with transparency, and for those
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