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Opinion

Macaskill on markets: CFTC intervention raises reputation risks over Hovnanian default

An unusual move by a US regulator threatens to widen a conflict over potential manipu-lation of Hovnanian default swaps by Blackstone’s credit arm GSO.

As delegates to the annual general meeting of the International Swaps and Derivatives Association (ISDA) gathered in Miami on the evening of April 24, they had a surprise regulatory intervention in a trading dispute to digest.

Christopher_Giancarlo-160x186

Christopher Giancarlo,
CFTC

The Commodity Futures Trading Commission (CFTC) announced that it is examining whether manufactured credit events designed to trigger default swaps constitute market manipulation, a few hours before ISDA delegates gathered at a reception by the pool in the Delano hotel in South Beach, and the implications of this action quickly became a main point of conversation.

“The statement came as a surprise – first because it was forceful, but also because the CFTC has not said much about the credit default swap (CDS) market before, but I think they will need to come out with more guidance than a press release,” said Fabien Carruzzo, a partner and head of the derivatives and structured product group at law firm Kramer Levin.

Opponents of Blackstone’s trading tactics designed to profit from default swaps it bought on homebuilding firm Hovnanian were understandably keen to frame the regulatory intervention as backing for their case.

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