Legal News

Parsing the Language of the Interdealer Broker; ?Fo Shiz?

By Dan Slater

Lawyers have called credit-default swaps unregulated side-bets and legalized gambling. Adds Eric Dinallo, New York’s superintendent of insurance, on the instruments: “There was no ‘there’ there.”

Sounds like a real mess. And now New York regulators are are trying to clean it up. The latest: an examination of middlemen in the market for credit-default swaps, known as interdealer brokers — the generally small, independent shops that serve as matchmakers for Wall Street firms trading in CDSs, bonds and other instruments. Interdealer brokers, the Journal tells us, are at the nexus of the Wall Street information flow, with unique insight into the trading activities of their clients. (See nifty graphic.)

The office of NY AG Andrew Cuomo reportedly subpoenaed trading data and other communications from eight of these interdealer brokers. The SEC also is conducting separate inquiries into the market. Potential targets: Market players who, during August and September, may have spread false information to manipulate prices for CDSs, which are insurance-like contracts in which a buyer makes regular payments to a seller, who in turn agrees to make a payout if a company defaults or files for bankruptcy protection. Over the past decade, the CDS market grew to $33 trillion, according to the WSJ.

Lacking any central regulator or industrywide rules, the CDS market has long had a freewheeling culture, where information is swapped in offhand remarks in instant-message chats. “The interdealer brokers appear to be overseen by no one and governed by loose standards and gentlemen’s agreements,” said one person involved in the investigation.

Interestingly, the Journal story provides a window into the behavior of interdealer brokers through a 2007 lawsuit filed by brokerage firm IDX Capital against brokerage Phoenix Partners Group. The suit alleges that Phoenix interfered with a deal to sell IDX to another trading firm. Note some of the IM conversations that emerged in discovery:

• In August, 2004, for instance, current Phoenix partner Marcos Brodsky sent J.P. Morgan Chase & Co. credit-derivatives trader Roman Shukhman an electronic message informing him of what other clients were interested in buying, according to court documents. Mr. Brodsky wrote the message using broker slang: “hvol offer is gs fyi.” It conveyed that Goldman Sachs appeared to be looking to sell a position in a credit-default-swap index called “hvol.”

  Mr. Brodsky then indicated that Lehman Brothers was interested in Goldman’s offer. “Leh checkin,” wrote Mr. Brodsky. Mr. Brodsky adds later that, “leh now sayin the[y] don’t care.”

• In a separate exchange from July 2004, Mr. Shukhman [a J.P. Morgan credit-derivatives trader] wrote to Mr. Brodsky, “I want to know when simpson is on the other side,” referring to finding out when a Deutsche Bank AG trader named Matt Simpson was in the market . “Fo shiz,” wrote Mr. Brodsky, using slang for “for sure.

J.P. Morgan declined to make Shukhman available to the WSJ for comment. Deutsche Bank declined to make Simpson available.

Full post as published by Law Blog - WSJ.com on November 13, 2008 (boomark / email).