The anticipated growth of a secondary market in collateralized debt obligations has thrown the legitimacy of trustee reports into question and brought up concerns about insider trading. Investors receive trustee reports about their positions, which are not automatically available to the rest of the market, and this could mean they have insider information, according to lawyers. Although the laws vary in each country, the principals are the same across Europe and the U.S., noted several lawyers.
"If the note holder has been given information that the rest of the market does not have then there is a discrepancy and that would point toward there not being a level playing field," explained Patrick Clancy, counsel at Shearman & Sterling in London. He added, "If you had this in equities I think the matter would be clear. This should be no different in debt."
"If the information is price sensitive and its about an E.U. listed security then you cannot trade on it," according to Simon Firth, partner at Linklaters in London. For example, investors could be guilty of insider trading if information they had seen in a trustee report led them to sell a tranche of a CDO to an investor who had not seen the report, explained lawyers.
Another lawyer, however, disagreed saying it is up to the potential buyer to do more due diligence. He added that in the corporate bond market bond holders are given more information than shareholders, such as notices of extraordinary meetings.
One solution is to make the trustee reports available to everybody and several firms, such as Goldman Sachs and Morgan Stanley, have started to go down this route and post trustee reports with third-parties. The problem with this is that CDO managers will not want to give away information to other CDO managers so the amount of information in the reports will likely fall, according to investors. "It is no good the trustee sending this out on the basis that it is confidential," said Clancy.
