Posted on 10/13/2008 4:12:55 PM PDT by Moonman62
New York, October 11, 2008 – The idea that the industry lacks a central registry for over-the-counter (OTC) credit default swaps (CDS) is grossly misleading and has resulted in inaccurate speculation on a number of matters, including the overall size of the market, its role in the mortgage crisis, and the size of potential payment obligations under credit default swaps relating to Lehman Brothers. The extent to which such speculation has fueled last week’s market turmoil is difficult to determine. The facts are these:
Central Trade Registry
* In November 2006, The Depository Trust and Clearing Corporation (DTCC) established its automated Trade Information Warehouse as the electronic central registry for credit default swaps. Since that time, the vast majority of credit default swaps traded have been registered in the Warehouse. In addition, all of the major global credit default swap dealers have registered in the Warehouse the vast majority all contracts executed among each other before that date.
Size of the Market
* Reported estimates of the size of the credit default swap market have so far been based on surveys. These surveys tend to overstate the size of the market due to each party to a trade separately reporting its own side. Thus, when two parties to a single $10 million dollar trade each report their “side” of the trade, the amount reported is $20 million, which overstates the actual size by a factor of two since both reports relate to a single $10 million contract. When examining the outstanding amount of actual contracts registered in the Warehouse (not separately reported “sides”) as of October 9, 2008, credit default swap contracts registered in the Warehouse totaled approximately $34.8 trillion (in US Dollar equivalents). This is down significantly from the approximately $44 trillion that were registered in the Warehouse at the end of April this year.
Percentage of the Market Related to Mortgages
* Less than 1% of credit default swap contracts currently registered in the Warehouse relate to particular residential mortgage-backed securities. Mortgage-related index products also have some components relating to residential mortgages and, as a whole, also constitute a relatively small fraction of total credit default swaps registered in the Warehouse.
Payment Obligations Related to the Lehman Bankruptcy
* One of the many central servicing functions of the Trade Information Warehouse is to caculate payments due on registered contracts, including cash payments due upon the occurrence of the insolvency of any company on which the contracts are written. Calculated amounts are netted on a bilateral basis, and then, for firms electing to use the service, transmitted to CLS Bank (the world’s central settlement bank for foreign exchange) where they are combined with foreign exchange settlement obligations and settled on a multi-lateral net basis. Currently, all major global credit default swap dealers use CLS Bank to settle obligations under credit default swaps. It is expected that all major institutional players in the credit default swap market will use the same process for settlement by the end of 2009. * The payment calculations so far performed by the DTCC Trade Information Warehouse relating to the Lehman Brothers bankruptcy indicate that the net funds transfers from net sellers of protection to net buyers of protection are expected to be in the $6 billion range (in U.S. dollar equivalents).
DTCC has long supported the U.S. and global capital markets as a critical part of their operational infrastructure.We stand ready to play a constructive role in whatever overall regulatory environment ultimately emerges for the credit default swap market. We do believe, however, that whatever environment emerges should be based on assessment of the facts as they stand, rather than speculation.
About DTCC
DTCC, through its subsidiaries, provides clearance, settlement and information services for equities, corporate and municipal bonds, government and mortgage-backed securities, money market instruments and over-the-counter derivatives. In addition, DTCC is a leading processor of mutual funds and insurance transactions, linking funds and carriers with their distribution networks. DTCC’s depository provides custody and asset servicing for more than 3.5 million securities issues from the United States and 110 other countries and territories, valued at US$40 trillion. In 2007, DTCC settled more than US$1.86 quadrillion in securities transactions. DTCC has operating facilities in multiple locations in the United States and overseas.
DTCC Deriv/SERV LLC, a wholly-owned subsidiary of DTCC, provides automated matching and confirmation for OTC derivatives contracts, including credit, equity and interest rate derivatives. According to major market participants, over 90% of credit derivatives traded globally are electronically confirmed through Deriv/SERV. The Trade Information Warehouse, a service offering of Deriv/SERV launched in November 2006, is the market’s first and only comprehensive trade database and centralized electronic infrastructure for post-trade processing of OTC derivatives contracts over their lifecycles, from confirmation through to final settlement.
For more information on DTCC and DTCC Deriv/SERV, visit www.dtcc.com.
I used to work at DTCC. 55 Water St. That’s where I was working on 9-11. Glad I don’t work there now.
What a relief! Only $34.8 trillion in credit default swaps instead of banks and other institutions holding cash in reserve. What was I thinking?
The call has been for a regulated exchange rather than a registry, which DTCC appears to be. What did DTCC do to insure these securities were properly rated?
I'm sure they made sure copies of all paperwork were stored in a clearly marked manila folder.
Finally some real facts in this debate.
1% of the $34 trillion dollar market in CDS are related to residential mortgages.
Should there be a regulated exchange? Yes. Is the system wildly out of control and fraught with fraud? No. Is the real problem the fact that the SEC authorized ONLY TWO rating agencies? Yes. Is the real underlying problem the fact that $1 Trillion in sub-prime loans was, in essence, guaranteed by the taxpayer with little disclosure of that fact? Yes.
Have a question for you. And it's not to impugn you for I don't know you or what you did at DTCC but I've heard that it's DTCC that does not enforce the 3-day settle date on shorts and allowed to naked shorting to run amok to such a degree as to collapse companies.
Would you comment on this and correct me where I may be wrong as I'm not nearly smart enough know all that stuff.
Thanks.
I wouldn’t expect DTCC to be involved with ratings. See post #6 in regards to ratings.
What a relief! Only $34.8 trillion in credit default swaps instead of banks and other institutions holding cash in reserve. What was I thinking?
“Credit default swaps” are insurance policies on securities that has a market of buyers and sellers. That the value of the policies exceeds $34 trillion, while the world economy is some $25-30 trillion, roughly, is just one of those pesky little details illustrating Wall Street’s greed and accompanying departure from the planet Earth.
The issue then is what is done when an insurance company defaults on it’s policies?
What would be the problem with requiring that anyone selling a stock short is expected to provide proof that they possessed the stock on the date of sale, and providing that if a seller fails to do so a buyer has 24 hours after to decide to: (1) accept the stock at the lowest trade price that occurred between the time of sale and the earliest time for which the seller can prove possession, or (2) reject the sale.
What difficulties would exist with implementing such a rule? If that rule were in effect, would there be any way someone engaging short selling could increase profit or reduce risk by doing so 'naked'? Also, is there any reason why exchanges should not ban anyone who is in default on their trades, until such time as all their defaults are cleared?
Short-sellers provide an essential and under-appreciated market function. If they were required to acquire shares before selling them, the damage that could be done by even a concerted short-selling effort would generally be slight, and the person attempting to inflict such damage would stand to lose a lot of money in the attempt.
The proper answer is that the insurance company is liquidated; the insured receive partial payment on their claims, and have to eat the rest.
Figuring out the optimal allocation of payments may at times be difficult, since until policies trigger or expire they represent unknown liabilities. Still, I would expect the procedure would be to bank a certain portion of the insurer's assets for future claims (assuming them to be somewhat larger than they're likely to be) and use the rest for current claims. If the estimate future claims exceeded the actual value, earlier claimants would receive a supplemental payment.
Whew, everything is hunky dory, what a relief.
That is exactly the problem. One needs standards for rating the various tranches and periodic random, surprise audits and penalties (at least) and/or jail time for violators. Problem is the bozos took our money for oversight and slept on the job.
I thought companies on the SHO list had to settle trades within 3 days. Don't ask me why, that's just the law, I think. And from what I've heard that law was not being enforced. I have no problem with shorting at all if done by the rules
The naked shorting is another matter. It actually happened where a man bought every outstanding share in a company but yet they traded in the 100's of thousands afterward. That's where, in my very humble opinion, the DTCC has been negligent. C
That's why I'd like to see the rules changed so the buyer can demand compliance. If the stock goes up after the short-seller has sold it, and the seller can't prove when he got it, the buyer gets the stock at the cheapest price the seller could have obtained it. If the stock goes down and the buyer no longer wants it, the seller has to see what he can do with the shares he finally acquired but didn't sell.
I would think letting market participants enforce the rules when they have an incentive to do so would be better than leaving enforcement in the hands of an agency with little such incentive.
If the guy held all the shares but there were still unfilled orders outstanding, is there any reason he couldn't have put in an asking price of $50,000/share? He might not be able to sell a whole lot of shares at that sort of price (once somebody bought a share to make good his order, the buyer to whom the share was owed could sell it for $49,999) but if the people who sold the naked shorts wanted to avoid default they'd have to pay for their mistake.
Ah, HERE it is. The report I saw that's the genesis of my question. 25min.
I believe that you are referring to Robert Simpson's purchase of Global Links (there's an article at Euromoney here about that case).
I took a look at the Edgar filings for Global Links, and I noticed an interesting follow-up to this; a gentleman who bought shares subsequent to Mr. Simpson's purchase actually bought enough so that he needed to file (he bought over 15% of the ostensible shares, but of course, Mr. Simpson already owned 100% of the company...)
The Edgar filing is here.
The gist of the filing is this section:
The Reporting Person acquired his interest in the Issuer primarily to point out the complete failure of government and exchange regulatory bodies to maintain honest, orderly markets, and the corrupt actions of market makers and securities clearing bodies, which facilitate the sale of unissued, unregistered, counterfeit, or simply nonexistent securities.
On February 3, 2005 a single investor reportedly purchased all the common shares issued by the company, plus 145 additional unissued shares.
Subsequent to that date, over 95 million shares, or over 82 times the total shares issued, were reportedly traded, none of which were reportedly sold by the 100% owner of the common stock.
On March 4 and 7, I purchased a total of 180,000 shares, resulting in my obtaining 15.54% ownership of a stock reportedly already 100% owned by another investor. I assume that there may be additional investors who may also claim ownership of common shares of this company.
I have requested that certificates be issued to me representing my full 15.54% ownership interest, to protect my right to vote and enforce any other claims that may accrue to an actual documented owner.
I understand that Reg. SHO was supposed to detect and prevent the fabrication of millions of nonexistent shares. It would appear that my securities purchases prove that Reg. SHO has been systematically violated by market-making brokers and securities-clearing firms.
From time to time I may continue to purchase additional securities on the open market to increase my ownership interest to up to 100% of the company's common stock to give me an ownership interest equal to that of the current 100% owner.
Sometime after he bought 100% of the shares, 50million were traded in two days.
It's guys stealing the American dream.
BTW, how hard would it be to add stock certificate numbers to electronically-traded stocks? I would expect that it would require reworking a lot of the computer systems, but such a change might do a lot to avoid the type of nonsense described here. If I claim to have twenty shares of stock, and I sell ten shares to two people, the shares should have distinct serial numbers. If the two people discover that some of their shares have matching numbers, they should recognize that something fishy is going on.
BTW, how is someone who holds fictitious shares supposed to receive his dividends? If my broker tells me I have 100 shares of AcmeCo, I should receive 100x the per-share dividend. If my broker doesn't actually have the stock, where is that dividend going to come from?
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