Market manipulation and insider trading claims involving securities-based credit default swaps

In 2008, credit default swaps (CDS) and other over-the-counter (OTC) derivative instruments, brought Wall Street to its knees. Since then, CDS, in particular, have come under scrutiny by regulators and by market participants as potential sources of excessive risk. CDS also have come under increasing scrutiny as potential mechanisms for securities-related trading abuses. More recently, the SEC brought its first enforcement action alleging insider trading using credit default swaps. The SEC similarly has indicated that it is concerned about market manipulation in securities underlying CDS. Regulators unquestionably are interested in the possibility of market manipulation and insider trading claims associated with transactions in securities-based CDS. Evaluating abuses associated with CDS and working to provide further transparency to the CDS market has been a priority of the SEC for more than a year. The SEC also is interested in the integrity of the OTC CDS markets themselves and the protection of participants in those markets.