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Update to June 2019 Joint Statement on Opportunistic Strategies in the Credit Derivatives Market

SEC Chairman Jay Clayton

CFTC Chairman Heath Tarbert

FCA Chief Executive Andrew Bailey

Sept. 19, 2019

U.S. Securities and Exchange Commission (SEC) Chairman Jay Clayton, U.S. Commodity Futures Trading Commission (CFTC) Chairman Heath Tarbert , and U.K. Financial Conduct Authority (FCA) Chief Executive Andrew Bailey issued the following update to the June 24 joint statement regarding the credit derivatives markets:

On the 24th of June 2019, the Chairmen of the U.S. Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission, along with the Chief Executive of the U.K. Financial Conduct Authority, released a joint statement on opportunistic strategies in the credit derivatives markets (the Joint Statement).  The Joint Statement outlined mutual concerns about the pursuit of these strategies and the adverse impact they may have on the integrity, confidence and reputation of the credit derivatives markets, as well as markets more generally.  These opportunistic strategies include, but are not limited to, what have been referred to as ‘manufactured credit events’ or ‘narrowly tailored credit events’.

The International Swaps and Derivatives Association (ISDA) recently released a proposed protocol designed to address certain issues related to narrowly tailored credit events.  This protocol contains two amendments to the 2014 ISDA Credit Derivatives Definitions.  One relates to the Failure to Pay definition and the other to the Outstanding Principal Balance definition.  We welcome these efforts.

As a general matter, we expect firms to consider how the aforementioned opportunistic strategies may impact their businesses and to take appropriate action to mitigate market, reputation and other risks arising from these types of strategies.  With regard to the proposed ISDA protocol, firms should consider how adherence to the proposed ISDA protocol may help them mitigate these risks.  Firms should also consider the risks to which they may be exposing themselves by trading with counterparties who do not adhere to the proposed ISDA protocol.

However, by itself, the proposed ISDA protocol will not address many of the concerns identified in the Joint Statement, such as opportunistic strategies that do not involve narrowly tailored credit events. We look forward to further industry efforts to improve the functioning of the credit derivative markets and welcome continuing engagement with market participants.

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