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U.S., UK regulators to crack down on credit derivatives abuses

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LONDON (Reuters) – U.S. and British derivatives and securities market regulators said on Monday they will collaborate to stamp out abuses known as “manufactured credit events”.

The Commodity Futures Trading Commission (CFTC), the U.S. Securities and Exchange Commission (SEC), and Britain’s Financial Conduct Authority (FCA) said in a joint statement that the continued pursuit of “various opportunistic strategies in the credit derivatives markets” may adversely affect integrity and confidence in them.

“These opportunistic strategies raise various issues under securities, derivatives, conduct and antifraud laws, as well as public policy concerns,” CFTC Chairman Christopher Giancarlo, SEC Chairman Jay Clayton, and FCA Chief Executive Andrew Bailey said.

The agencies said they will make “collaborative efforts to prioritize the exploration of avenues, including industry input, which will address these concerns”.

U.S. companies are trying to stop speculative investors from calling events of default on leveraged loans to get payouts under credit default swap (CDS) contracts at the expense of other lenders as investor activism rises.

Companies are trying to tighten loan documentation to limit aggressive investors from pushing agendas that benefit their CDS holdings above the interests of borrowers or other lenders.

It follows two highly publicised U.S. court cases involving homebuilder Hovnanian and telecom service provider Windstream.

“These collaborative efforts would not, of course, preclude other appropriate actions by our respective agencies or authority,” the agencies said.

(Reporting by Huw Jones, editing by Carolyn Cohn)

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