Wall Street banks and hedge funds are closing in on a fix that they hope will clean up an $8 trillion portion of the derivatives market that’s gained a reputation for being one of the shadiest corners in finance, Bloomberg News reported. At issue are a number of transactions in recent years in which powerful investment firms have been accused of earning big money from swaps trades by enticing companies to miss bond payments they could otherwise make. The practice has eroded market confidence, triggered legal fights and led to scrutiny from regulators. At issue are a number of transactions in recent years in which powerful investment firms have been accused of earning big money from swaps trades by enticing companies to miss bond payments they could otherwise make. The practice has eroded market confidence, triggered legal fights and led to scrutiny from regulators. After months of negotiations, titans including Goldman Sachs Group Inc., JPMorgan Chase & Co., Apollo Global Management and Ares Capital Corp. have agreed to a plan that’s intended to ensure defaults are tied to legitimate financial stress, not traders’ derivatives bets. An industry trade group, the International Swaps and Derivatives Association, may propose the overhaul as soon as Wednesday. The revamp would affect credit-default swaps, instruments that contributed to the 2008 financial crisis that insure against a bond issuer’s bankruptcy or failure to pay. But the fix is limited to one type deal, so-called manufactured defaults, and it remains unclear whether it will bolster confidence in a corner of the market that critics say has become a playground for creative traders and lawyers.
