Wall Street’s push to clean up a $10 trillion corner of the derivatives market is getting poor reviews from an important audience: global financial regulators, Bloomberg News reported. Behind closed doors, watchdogs from Washington, D.C., to London have made clear that a fix the industry came up with this year to crack down on shady deals falls short of what’s needed. The focus of the scrutiny is credit default swaps — instruments tainted by the 2008 financial crisis that traders use to cash in when companies miss bond payments. The pushback hasn’t been subtle. Staff members at the Commodity Futures Trading Commission, the U.S.’s main derivatives regulator, prepared an internal analysis in recent weeks that concluded hedge funds can still profit from CDS in numerous ways by engineering questionable corporate actions, three people said. The agency has shared its findings with other regulators. In June, the U.S. Securities and Exchange Commission and the U.K.’s Financial Conduct Authority joined the CFTC in issuing a rare public statement in which the watchdogs pledged to work together to combat “opportunistic strategies” involving CDS. And the CFTC took the extraordinary step of hosting a July podcast for agency officials to discuss red flags they’re seeing in the market, and how deals are proliferating with seven occurring in the past six months.
