CDS Pushback by Municipalities

The municipal market continues to evolve.  I would expect that if California is successful in this attempt, we will see it for most of the larger issuers.  I do not think the smaller issuers will be able to force it on underwriters.  This cannot be viewed favorably by the banks, but I do not think it will have a material impact on them.

(Dow Jones) Bill Lockyer, California's state treasurer, has amended a quarterly questionnaire for all 86 of the state's bondunderwriters, forcing them to disclose what credit default swaps they have traded on the state's bonds, either for customers or for their own accounts.

The disclosure forms could be sent to underwriters as soon as this week. The aim is to better understand how credit default swaps, or CDSs, are affecting the state's borrowing costs, said Tom Dresslar, a spokesman for the state treasurer's office.

"Banks are always saying that by permitting hedging of risk, it will improve liquidity for bonds. But there is no evidence of people with actual exposure to muni bonds being a substantial part of the CDS market," Dresslar told Dow Jones Newswires. "In fact, we believe the evidence points to the contrary--that most of the trading is done by speculators who have no skin in the game."

California's underwriters will have to disclose their gross and net notional CDS volumes over the last three months, starting with the current quarter. Their responses will be due before Jan. 31.

While the treasurer's office does not have the authority to prohibit banks from trading CDSs on the state's bonds, it can take their CDS activities into account when making decisions about membership in its underwriting pool and in selecting bookrunners for its bond sales, said Dresslar.