Engineered Defaults Are ‘Wrong Side of Line,’ FCA Chief Says
- Practice risks bringing the credit swaps market into disrepute
- Scrutiny follows Blackstone and Hovnanian controversy
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Persuading a company to default on debt to cash in on contracts insuring against that very prospect is an abuse that will damage the reputation of the market, according to the head of the U.K.’s financial watchdog.
Corporate credit-default swaps pay holders if a borrower fails to repay its debts. The instruments have come under scrutiny after a unit of Blackstone Group LP bought protection on the debt of ailing U.S. homebuilder Hovnanian Enterprises Inc. and offered it cheap refinancing in return for agreeing to default on a bond. Hedge funds that were on the hook for losses sued.