Public Intelligence

European Central Bank ECB chief Jean-Claude Trichet (L) speaks with International Monetary Fund Managing Director Dominique Strauss-Kahn (R) before the Conference on the construction of a new crisis management framework in the banking at the EU headquarters in Brussels on March 19, 2010. AFP PHOTO/JOHN THYS (Photo credit should read JOHN THYS/AFP/Getty Images)

ECB’s Trichet Warns of Swaps Misuse (AP):

European Central Bank chief Jean-Claude Trichet has warned that credit default swaps “should not be misused in a speculative manner.”

In a Friday speech, he says the credit default swaps market needs to be more transparent to regulators and investors.
EU regulators have threatened to ban the use of credit default swaps, a type of insurance on government debt, when the investor does not actually own the underlying debt. They blame swaps traders for unfairly increasing pressure on Greek borrowing costs.

ECB Trichet: CDS Should Not Be Misused In Speculative Fashion (Market News International):

Trading of instruments intended for hedging risk not used in a purely speculative way, European Central Bank President Jean-Claude Trichet said here Friday.

“I would like to highlight the importance that certain financial instruments, which were introduced in consideration of their positive effects for the hedging of risks, should not be misused in a speculative manner,” Trichet said in the text of a speech provided by the ECB. “I share the consensus at global level that regulators should be equipped with appropriate tools to be able to investigate and act in an effective and coordinated manner.”

He added: “We need more transparency in CDS markets, and so do investors. Transparency of markets is a public good. Authorities must be able to gather information, to assess possible risks for financial stability and detect possible improper conduct.”

Trichet said that a “key priority” for improving CDS markets is the creation of “central counterparty facilities,” which would help to diversify and share risk, as well as to provide more transparency. And by requiring margins, these exchanges can also “reduce the incentive to take excessive risks,” Trichet said.

The ECB president also said that the current crisis calls for re-evaluation of “the role of finance in our economies and our societies.”

Trichet calls for more transparency in CDS markets (MarketWatch):

The president of the European Central Bank called on Friday for more transparency in the markets for credit-default swaps. Speaking in Brussels, Jean-Claude Trichet said that “certain financial instruments, which were introduced in consideration of their positive effects for the hedging of risks, should not be misused in a speculative manner.” Trichet said regulators should be equipped with appropriate tools to be able to investigate and act effectively. “We need more transparency in CDS markets, and so do investors,” Trichet said. “Transparency of markets is a public good. Authorities must be able to gather information, to assess possible risks for financial stability and detect possible improper conduct.” A key priority for CDS markets is the establishment of central counterparty facilities, which will help to diversify and share risk exposures, and their margining procedures will reduce the incentive to take excessive risks, Trichet said. CDS are derivatives designed to transfer the credit exposure of fixed-income products between parties.

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