Citadel Securities's Swaps Chief Frets Over Engineered CDS Deals

(Bloomberg) -- One of the world’s biggest swaps traders joined the uproar over an engineered debt default designed to trigger payouts on credit-default swaps.

Paul Hamill, who oversees swaps trading at Citadel Securities LLC, said such manufactured credit events could damage the $11 trillion CDS market. He joins a chorus of market participants and overseers speaking out on such trades, including the U.S. Commodity Futures Trading Commission, which said last week that it might take action, arguing such trades could be a form of market manipulation.

“Anything that undermines the potential robustness and safety of the product is going to be generally negative for investors,” Hamill said in a Bloomberg Television interview Tuesday at the Milken Institute Global Conference in Beverly Hills, California. But he’s optimistic the trades won’t go through as its designers planned. “I’m confident the market will get the right outcome here.”

The dust-up concerns an agreement by Blackstone Group LP’s GSO Capital to loan Hovnanian Enterprises Inc. money if the homebuilder took steps to trigger payouts on credit-default swaps. GSO had bought about $333 million of CDS protecting against a Hovnanian default.

Citadel Trades

Citadel’s hedge fund was also caught up in the Hovnanian trading. People familiar with the matter said in November that Citadel LLC -- which like Citadel Securities was created by billionaire Ken Griffin -- was involved in Hovnanian CDS trades.

While the CFTC said last week that it could intervene in the CDS market, Chairman Chris Giancarlo told Bloomberg Television Monday that he would prefer the International Swaps & Derivatives Association to resolve the matter with market participants after a review of the contracts that govern the trades.

“Often the best evolution is through market participant action,” he said, also at the Milken conference. “There’s an opportunity for ISDA to clarify the appropriate way for such defaults to be done. It’s time to take another look at their documentation.”

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