EU to propose greater transparency for default swaps on eight banks

5:21 pm Wednesday, May 31st, 2023

By Huw Jones

LONDON (Reuters) -The European Commission will propose greater transparency in the trading of credit default swaps of eight top banks to mirror rules in U.S. markets, a European Union document seen by Reuters showed on Wednesday.

So-called single name credit default swaps (CDS) have come under regulatory scrutiny after the fall and state-backed rescue of Credit Suisse triggered high volatility on the CDS market for some systemic banks, Deutsche Bank in particular, on March 24.

“One of the conclusions on the events of Friday, 24 March, was that single name CDS contracts are opaque and illiquid,” the EU executive body said in a document for a meeting of EU states on Thursday.

This would explain why a single, rather small CDS contract can trigger major moves in the price of both the CDS reference entity’s debt and equity, said the paper which proposes “targeted amendments” to the bloc’s post-trade transparency rules for over-the-counter derivatives.

The Commission said it proposes to re-insert CDS on Santander, BNP Paribas, Credit Agricole, Deutsche Bank, ING Bank, Intesa Sanpaolo, Societe Generale and DZ Bank into the scope of derivatives transactions subject to post trade transparency.

EU states and the European parliament are negotiating an update to the bloc’s ‘MiFID II’ financial market rules, into which the stronger transparency requirement would be inserted.

EU securities watchdog ESMA would then set out a framework for publishing CDS prices and the order of “seniority” in which CDS spreads would need to be published to avoid confusion in the market, the document said.

Incomplete and asymmetrical reporting of CDS contracts linked to systemically important banks causes insecurity in markets during shocks, the paper said.

“A comparative analysis of the US and European post trade public reporting rules pertaining to single name CDS demonstrates where the problem lies: information asymmetry between two global markets that invariably trade CDS on the same reference entities,” it added.

U.S. derivatives regulators require publication of a CDS transaction as soon as technologically possible, typically within 15 minutes for volumes above $5 million.

In Europe, transactions are published on the second working day after the date of the transaction, with a delay of up to four weeks allowed by regulators in some cases.

(Reporting by Huw Jones; Editing by Jon Boyle, Kirsten Donovan and Emelia Sithole-Matarise)