(Bloomberg) -- Europe’s top financial markets regulator is pushing for greater disclosure on credit default swaps after swings in the derivatives temporarily plunged Deutsche Bank AG into turmoil earlier this year.
The supervisory body, which said it was scrutinizing the CDS market after the German lender’s shares slumped as much as 15% on March 24, wants to increase the speed and granularity of reporting positions, according to chair Verena Ross. That includes those of counterparties outside the European Union, she said.
Credit default swaps are used by investors to hedge risk or make bets on companies. After Deutsche Bank’s plunge fueled a wider sell-off, regulators focused on a single trade in what they called an illiquid part of its credit default swaps that they suspect had sparked concern, Bloomberg reported at the time.
“There’s not much transparency in that market - neither to the supervisory authorities, nor to the wider markets,” Ross said in an interview in the Polish city of Sopot on Monday. “A single trade can have quite a signaling effect.”
Deutsche Bank Chief Financial Officer James von Moltke said in late April that his firm was the victim of a “speculative attack.” “We were tested and we showed ourselves to be a strong stable bank without the vulnerabilities that the market was concerned about,” he told analysts on a conference call to discuss first quarter earnings. The turmoil came at a time when global markets were particularly nervous because of the troubles at US regional lenders and Credit Suisse Group AG.
ESMA has written to the European Commission, European Parliament and Council of the European Union, which was already updating markets regulation, asking them to address the points Ross raised.
Andrea Enria, who leads the European Central Bank’s oversight arm, had proposed going further by clearing CDS on single companies rather than let them continue to trade over the counter, which would provide added transparency yet probably also prove more costly.
He criticized transactions in the asset class as “opaque”, a characterization rejected by the International Swaps and Derivatives Association, which represents participants in those markets.
“Forcing that into central clearing could be counterproductive because you might actually start increasing the risks for the central clearing infrastructure,” said Ross. “At least, that’s not something that we are proposing to move forward on at the moment.”
Clearing Deadline
Beyond the CDS market, Ross also signaled that some clearing of trades from the EU may be allowed to continue in the UK after it left the bloc.
“The aim is clearly that more of the clearing business over time takes place in the European Union. That’s the goal,” said Ross. “But that does not necessarily need to mean that 100% of clearing needs to move to the EU.”
Clearing trades is a core part of the financial system and one of the most important changes facing the City of London following a Brexit deal that made little provision for cross-border finance. Clearinghouses such as London Stock Exchange Group Plc’s LCH operate at the center of markets, collecting collateral from both sides of a trade to shield the wider system from a default.
--With assistance from William Shaw.
©2023 Bloomberg L.P.
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