The Road to CDS Transparency Continues

 As a follow up to recent posts regarding credit default swaps (CDSs), note that on November 14, 2008, the SEC issued a Memorandum of Understanding with the Federal Reserve Board and the Commodity Futures Trading Commission dealing with central counterparties for over-the-counter CDSs.  Normally, CDS prices are viewed as one measure of the market’s opinion of a company’s credit quality, and they generally track prices on the underlying debt. Currently, however, there has been enormous volatility in CDS prices, even within the course of a single day, as investors have become skittish due to a worsening economy. Noting that the over-the-counter market for CDSs has gone largely unregulated and hugely contributed to the current financial crisis, Chairman Cox stated that the SEC will use its regulatory and supervisory authority over the clearing agencies that may possibly be established for CDSs and "will use those authorities to strengthen the market infrastructure and to protect investors."  Refer to the President's Working Group on Financial Markets' press release, for additional information on plans to regulate that market.