Event Publicly Available Information:
General Interest Question to the Determinations Committee in connection with the SRAC Credit Event:
Should the Auction Settlement Terms for the SRAC Credit Event be revised to include the following amendments, or variations thereof as deemed appropriate by the Determinations Committee, to mitigate or eliminate the detrimental effects of possible illegal manipulative conduct and activity that could artificially affect the Auction Final Price?
There have been allegations of potentially illegal manipulative conduct in connection with the buying and selling of deliverable obligations in anticipation of the SRAC CDS auction. Such alleged conduct, if true, appears to be targeted at affecting the Auction Final Price. Such illegal manipulative activity, if in fact occurring and left unaddressed, would have significant detrimental effect on the integrity of the CDS auction and its results, and in the confidence in the proper functioning of the overall CDS market.
“Manipulation” can be defined as intentional conduct designed to deceive investors by controlling or artificially affecting the market for a security. Manipulation can involve a number of techniques to affect the supply of, or demand for, a security, including: spreading false or misleading information about a company; improperly limiting the number of publicly-available shares; or rigging quotes, prices or trades to create a false or deceptive picture of the demand for a security.
Manipulation that rises to the level of illegal activity can be subject to various civil and criminal sanctions.
In order to protect the integrity of the SRAC CDS auction, we propose that the following amendments be made to the Auction Settlement Terms (AST) for the SRAC CDS auction:
• Section 3 (Customer Physical Settlement Requests): amending the second sentence of Section 3 by the addition of the bracketed language below:
“Each Customer Physical Settlement Request submitted to a Participating Bidder must be, to the best of the relevant customer\'s [good faith] knowledge and belief, on the same side of the market as, and (when aggregated with all other Customer Physical Settlement Requests, if any, submitted by such customer and/or the Affiliates of such customer to one or more other Participating Bidders) not in excess of, [an amount equal to] such customer\'s Market Position [not arising from, as a result of or in connection with any illegal manipulative activity, minus any Deliverable Obligations acquired by such customer arising from, as a result of or in connection with any illegal manipulative activity].”
• Section 4 (Initial Market Submissions and Dealer Physical Settlement Requests: amending the last sentence of Section 4 by the addition of the bracketed language below:
“Each Dealer Physical Settlement Request must be, to the best of the relevant Participating Bidder\'s [good faith] knowledge and belief, on the same side of the market as, and not in excess of, [an amount equal to] the Market Position of such Participating Bidder and/or the Affiliates of such Participating Bidder [not arising from, as a result of or in connection with any illegal manipulative activity, minus any Deliverable Obligations acquired by such customer arising from, as a result of or in connection with any illegal manipulative activity].”
• Exhibit 2 (Form of Customer Physical Settlement Request Letter):
o Amending paragraph (b) by the addition of the bracketed language below:
“(b) the Customer Physical Settlement Request set out below is, to the best of our [good faith] knowledge and belief,”
o Adding to paragraph (b) the following additional sub-clause (iii):
“[(iii) not in excess of, an amount equal to such customer\'s Market Position not arising from, a result of or in connection with any illegal manipulative activity, minus any Deliverable Obligations acquired by such customer arising from, as a result of or in connection with any illegal manipulative activity.]”