Concerned about the proliferation of a succession of “misunderstandings” regarding Credit Default Swaps (CDSs), the world’s biggest custodian company of these contracts announced that it will disclose information about them to the market as of November. The Depository Trust and Clearing Corp. (DTCC) registered US$ 55 trillion in CDSs, the derivatives that were treated as villains after the bankruptcy of the investment bank Lehman Brothers.
The CDSs were created by DTCC, a company controlled by banks and stockbrokers such as JP Morgan and Goldman Sachs. They are the ones who will have to decide on the adoption of more transparency in the disclosure of swap contracts. About 90% of the credit swap operations in the world are compensated in DTCC’s electronic network, called Trade Information Warehouse.
The expectation is that the market will benefit from DTCC’s information . An example would be what happened to Lehman Brothers, a bank that suffered with speculation. Analysts suggested that the bank owed US$ 400 billion in CDSs, while DTCC knew that Lehman appeared as a party in contracts that totaled US$ 72 billion, from which they had to pay US$ 5.2 billion. The fear, therefore, was exaggerated.
The greatest transparency – if it occurs – would result from the criticism and threats of regulation that CDSs have received since they became known to the public. At the end of October, in CBS’ TV program 60 Minutes, the Superintendent of Insurance for New York, Eric Dinallo, called the CDS a “legalized gamble.” It would be wise for the industry to worry about this superintendent. As of January 2009, Dinallo will inspect the CDSs, after New York legislation classifies it as part of the concept of insurance, an activity regulated by the states.