A set of guidelines on the handling of non-public price sensitive information, set to be published in mid-May, warns European banks against the misuse of private information when trading instruments, such as credit default swaps, could lead to insider trading charges.
The guideline, set out by the European Working Group, is a collaborative effort of the Bond Market Association, the International Association of Credit Portfolio Managers, the International Swaps and Derivatives Association, the Loan Market Association and the London Investment Banking Association. The paper is the European application of guidelines recommendation published in October 2003 for the North American markets and demonstrates to European investors the seriousness with which banks and dealers, as well as regulators, treat the issue of price sensitive credit information.
"Banks occasionally, in the course of their business as lenders, have access to information that investors in credit derivative products (protection sellers) by dint of their own function in the markets do not have," said an International Swaps and Derivatives Association spokeswoman. "These guidelines make explicit the stringent Chinese walls' that banks as natural protection buyers observe in handling such information."
"The guidelines," she added, "reinforce what banks already put into practice in terms of keeping price sensitive information obtained in the role of lender isolated from their credit derivative trading operations."
The intention behind the recommendations is to reassure investors of the appropriate handling of such information and to demonstrate to regulators the protective nature of this behavior. "The importance of credit derivatives in European banking is undoubtedly tremendously significant (and growing), both as a risk management mechanism and as a flow product for the larger firms that also deal in these instruments," the spokeswoman also said. "While credit derivatives are a relatively new tool in balance sheet management (they began to appear in the early nineties), they are growing rapidly in use and application and provide a unique opportunity to isolate specific credit risks from other types of risk encountered in the lending business, while retaining the lending relationship."
But the International Swaps and Derivatives Association said that the guidelines are not meant to demonstrate to regulators that investors are better understanding the dynamics of the market's functioning, which the spokeswoman said still remained a separate issue entirely. "They do send a message to regulators that banks, which are also providers of credit derivatives, are sensitive to the perception of any potential for mishandling such information. It is not acceptable practice and indeed is far from the interests of the banks."
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