07 September 2011

Parliamentary question on CDS and the role of the ISDA

Pascal Canfin, rapporteur on the short selling and CDS dossier, submitted a written question to commissioner Barnier questioning the role of the International Swaps and Derivatives Association when determining what constitutes a sovereign credit event.

Question for written answer P-008013/2011 to the Commission

Rule 117

Pascal Canfin (Verts/ALE)

Subject: Credit default swap regulation and role of the International Swaps and Derivatives Association (ISDA)

The eurozone crisis is highlighting the potentially systemic consequences of a default by a sovereign issuer. A default of this kind would probably trigger the credit default swap contracts issued on that sovereign debt, which could lead to unexpected losses for financial institutions.

The task of determining what constitutes a sovereign credit event is currently left to a professional association, the ISDA, which brings together the main investment banks. The following companies are voting members of the committee responsible for determining whether a sovereign credit event has occurred: Bank of America/Merrill Lynch, Barclays, BNP Paribas, Crédit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase Bank, N.A., Morgan Stanley, Société Générale, UBS, BlackRock (Third Term Non-dealer), BlueMountain Capital (Second Term Non-dealer), Citadel Investment Group, LLC (First Term Non-dealer), D.E. Shaw Group (First Term Non-dealer) and Rabobank International (Second Term Non-dealer).

Does the Commission consider that these actors are in a position to take an objective decision, given that they all have clear conflicts of interest by virtue of the positions they take on the markets?

Does the Commission regard it as appropriate to let investment banks decide what constitutes a sovereign credit event?

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