Credit-default swap dealers often hold on to risk from big trades for longer than many investors thought, which may complicate efforts by regulators to impose new reporting rules in the $28.4 trillion market, according to a Federal Reserve report.
The world's biggest 14 banks didn't offset large corporate or sovereign CDS trades with customers on the same day 45% of the time, three months of actual trading data from May through July 2010 from the banks revealed, according to a study released Tuesday by the Federal Reserve Bank of New York. "This is also consistent with anecdotal evidence that dealers may hold on to positions for days or weeks before hedging," the report said.
The banks, through industry groups, have argued that a proposal to report large swap trades within 15 minutes is not enough time to protect them from competitors taking advantage of their need to hedge. Banks use hedging, which involves offsetting one trade with an opposite transaction, to protect themselves from losses. The Commodity Futures Trading Commission proposed the time limit last year in a bid to bring increased price transparency to the $601 trillion swaps market.
"The existing CFTC and [Securities and Exchange Commission] proposals for block trade reporting would likely increase (rather than decrease) costs for end users, including institutional investors and corporations seeking to manage risk or raise capital," the International Swaps and Derivatives Association and Securities Industry and Financial Markets Association said in January.
But the Fed report said, "Our analysis seems to suggest that requiring same-day reporting of CDS trading activity may not significantly disrupt same-day hedging activity, since little such activity occurs."
