Derivs - Regulation

The higher closing price of subordinate versus senior bonds during the settlement auctions of Fannie Mae and Freddie Mac yesterday have some market participants questioning how the results came about.

The U.S. government bailout package approved this afternoon didn’t immediately register a calming effect.

The Hong Kong Securities and Futures Commission has shelved new applications for retail structured products in response to a slew of complaints about notes arranged by or linked to Lehman Brothers.

A USD60 million differential in open interests to sell debt tied to Tembec Inc. versus orders to buy lowered the recovery value under credit default swaps referencing the troubled forest products company today.

More than 60% of asset managers, pension funds and large-cap companies recently surveyed by an independent consultant are in support of lifting the U.S. ban on stock short selling, newly extended to Oct. 17.

Asian credit default swap spreads stayed generally in the same range despite the U.S. Senate’s approval of the Treasury’s USD700 billion mortgage bailout plan.

The Securities and Exchange Commission’s move to relax its mark-to-market accounting rules could not have come a moment to soon, but more opaque guidelines for valuing the securities will likely raise the cost of credit default swap protection.

Corporate investors wary of credit derivatives but keen to retain exposure to the equity markets via options are pushing banks to structure equity-linked notes that keep the face value of the notes on balance sheet but the mark-to market returns on the options off balance sheet.

If the bailout plan gets passed eventually, the government should have little difficulty hiring junior staffers to work on distressed asset acquisitions. But, getting the more senior valuation talent will be tougher, according to one headhunter.

The rollover of all but two Markit CDX North American indices has been postponed until Thursday due to uncertainty over the bailout plan.

Investors are concerned moves to regulate credit default swaps could drag in equity options, since buying a put or call on a stock or index could be considered similar to downside protection offered by CDS.

A group of eight traders from dealer firms, referred to as the Default Management Group, have been seconded to the LCH.Clearnet’s clearing system for inter-bank interest rate swaps with a mandate to distribute legacy Lehman trades to new, qualifying counterparties.