CFTC Warns That "Manufacturing" CDS Events May Constitute Manipulation

The CFTC Divisions of Clearing and Risk, Market Oversight, and Swap Dealer and Intermediary Oversight ("Divisions") warned that intentional or "manufactured" events intended to trigger credit default swaps ("CDS") "may constitute market manipulation." The Divisions asserted that the "CDS market functions based on the premise that [reference entities] seek to avoid defaults."

The Divisions agreed with recent ISDA criticism of manufactured events stating that they could "severely damage the integrity of the CDS markets." The CFTC advised market participants and their advisors that "in instances of manufactured credit events, the Divisions will carefully consider all available actions to help ensure market integrity and combat manipulation or fraud involving CDS, in coordination with our regulatory counterparts, when appropriate."