Citadel Pushes SEC to Fix Fractured Credit-Default Swaps Market

Ken Griffin’s Citadel is urging the U.S. Securities and Exchange Commission to finish writing rules that mandate central clearing of credit-default swaps -- a move it says would help revive a shrinking portion of the $13 trillion market.

The $25 billion hedge fund manager is pushing for rules that would require credit swaps trades linked to individual companies and countries to be settled through clearinghouses, according to a letter sent to the regulator. The so-called single-name CDS market is at a critical juncture and the SEC’s regulations related to securities-based swaps need to be completed this year, the firm said in the letter.

"The market is experiencing challenges with respect to liquidity and participation," Ritesh Shah, the chief operating officer of global credit at Chicago-based Citadel, said in an interview. Implementation of derivatives reforms linked to the 2010 Dodd-Frank Act are "needed to fundamentally improve market conditions for investors."

The move comes after more than two dozen investment firms including BlackRock Inc., Pacific Investment Management Co. and Citadel announced plans to voluntarily clear default swaps. The investors have been pushingfor changes across the market to help lead a revival at a time when increasing corporate failures may boost demand for credit insurance.

Unlike swaps tied to indexes, regulators haven’t yet required that all single-name credit swaps be settled through central clearinghouses. The trades have largely remained bilateral transactions between dealers and clients, requiring higher capital charges under banking regulations. While indexes in the U.S. are overseen by the Commodity Futures Trading Commission, individual contracts are regulated by the SEC.

With a credit swap, an investor is paid an annual premium for agreeing to insure against a default by a company or government. It’s a way for firms to hedge against losses as the expectation for defaults increase.

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE