Top Swaps Cop Hopes Traders Will Resolve Dispute Over GSO Trade

(Bloomberg) -- The top U.S. derivatives regulator would prefer participants in the credit-default swaps market take their own steps to settle a controversy triggered by a Blackstone Group LP trade.

The Commodity Futures Trading Commission warned last week that it might act to prevent manipulation after an uproar over a deal in which Blackstone’s GSO Capital loaned money to a homebuilder if the company agreed to take steps that would trigger a payout on CDS trades. Such manufactured defaults threatened to damage the integrity of the $11 trillion market, the regulator said.

CFTC Chairman Chris Giancarlo signaled he’d 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,” Giancarlo said in a Bloomberg Television interview Monday at the Milken Institute Global Conference in Beverly Hills, California. “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.”

Neither Giancarlo nor the CFTC has mentioned the GSO trade specifically. But in its statement last week the regulator said that “manufactured credit events” may constitute market manipulation and could “severely damage the integrity of the CDS markets.”

“The statement was deliberate,” Giancarlo said Monday. He declined to elaborate on the actions CFTC regulators could take, saying they have a “range of actions in our toolbox.”

“Our purpose was to let the entire marketplace know that we have a careful eye on this and that we will consider whether further steps need to be made in either the policy-making area or others,” he said.

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