As Argentina’s Securities Commission, the equivalent of the US Securities and Exchange Commission, rushes forward on an investigation into if US holdout hedge funds have violated US insider trading laws, does their understanding of US regulatory jurisdictional law need an upgrade?
(This article was updated 8/5/2014)
Argentina’s Securities Commission requested for trade documentation
Reuters is reporting that Alejandro Vanoli, the head of Argentina’s Securities Commission, has requested its “US counterpart” for trade documentation regarding Argentina’s sovereign debt and credit default swaps (CDS), derivative contracts potentially used by the holdouts to insure against default.
The apparent goal of the investigation is to determine if the “holdout hedge funds” purchased CDS derivatives based on insider information. As repeatedly reported in ValueWalk, behind the scenes Argentina was not expected to engage in serious negotiations. Did insiders, with knowledge that a lack of serious negotiation would likely lead to default, trade CDS derivatives contracts based on this insider information?
While this is the direction the Argentine government is taking, perhaps they might need a legal lesson in US regulatory jurisdictions.
In the US, derivatives are regulated by the Commodity Futures Trading Commission (CFTC), a critical distinction with regards to insider trading and derivatives. While SEC prohibits insider trading, in the derivatives markets it happens every day and is legal. Banks, insurance companies, farmers and producers all have inside information on supply and demand and legally hedge their risk every trading day based on this knowledge.
It is unknown if Argentina has reached out to the CFTCgovernment
CFTC sources said they could neither confirm nor deny the Argentine government had contacted them.
But to go to an even deeper level, while the SEC isn’t likely tracking the Argentine Swaps data, the real power tracking the trade might be the International Swaps and Derivatives Association (ISDA), that likely has the details of the trade.
Depending on the regulatory structure the contract was negotiated under – and when the contract was negotiated – the derivatives contract might not even be regulated under the CFTC. Unregulated Swaps transactions were popular among large financial institutions and hedge funds leading up to the 2008 market collapse, but only recently have government regulators begun to track such trades.
Regardless, Reuters is reporting that evidence of the hedge fund holdout derivatives trades might not exist. “There is absolutely no evidence to demonstrate that the holdouts hold Argentine CDS positions. No proof,” Reuters quoted a source familiar with the holdout hedge fund’s positions. While ISDA ruled Friday that Argentina was in default, it cannot disclose the participants in a Swaps contract because it does not have information on individual trade participants.
The ISDA Credit Derivatives Determination Committee doesn’t have jurisdiction over insider trading. The Committee’s role is limited to apply only to the terms of the contract – it doesn’t apply to ways that the contract was traded (including insider trading, etc.). The Determinations Committees make determinations that apply to credit derivative transactions on subjects including Credit Events, CDS Auctions, Successor Reference Entities and other issues. The determinations made by the DC are governed by the Determinations Committees Rules. ISDA acts as a non-voting secretary to each DC and endeavors to co-ordinate this process in a transparent and operationally efficient manner.
While Argentina’s request for an insider trading might be interesting — learning the CDS positions of the holdout hedge funds has been highly speculated upon topic — it might not generate the pound of flesh Argentina might want to extract from the hedge fund holdouts. A regulatory investigation might play well to the hometown media, it may be lacking in regards to its focus on insider trading in derivatives.