$1.2 Billion In Failed Emerging Mkt Debt
Trades Canceled
Dow Jones Newswires
NEW YORK -- The Emerging Markets Clearing Corp. canceled
approximately $1.2 billion in failed trades last week, principally Brazilian IDU
and Capitization bonds.
After gaining emergency clearance from the Securities and Exchange
Commission on Sept. 24, seven member firms spent four days pairing-off
failed transactions, concluding the process last Wednesday.
The cancellations involved EMCC's principal members: Chase Securities,
Daiwa Securities America, Lehman Brothers, Goldman Sachs, Morgan
Stanley Dean Witter, Merrill Lynch and Solomon Brothers. EMCC Vice
President Sean Delap said that over 90% of the cancellations involved
Brazilian debt instruments.
As a result of the pair-offs, EMCC reduced the number of open fail positions
by half, to around 1,000.
EMCC filed for permission to begin the pair-offs after a recent surge in the
number of failed transactions on its books. In its request, the clearing house
noted that during the last few weeks, the settlement rate on "certain
instruments" had plunged below 50% from the usual 98%.
In its decision, the SEC agreed with EMCC's contention that by eliminating
buy-ins, the pair-offs will reduce the potential for market volatility.
The rule change allows EMCC to conduct pair-offs "as frequently as (it)
deems necessary."
Some in the market were sharply critical of the SEC decision to allow the
cancellation of the failed trades. Critics charged that it reduced the
transparency of the market and benefited professional traders at the expense of
others.
"If you can show me one person that benefits from this other than the
professionals, I'd like to hear about it," said one head trader, who asked to
remain anonymous. The trader charged that the process essentially granted
traders "a free short."
"This is hugely advantageous to the professionals, and hugely disadvantageous
to Brazil," he said, arguing that it was fast becoming "a rigged market."
Delap, of the Emerging Markets Clearing Corp., denied the move would
encourage traders to take short positions. "Traders are going to do what
traders are going to do," said Delap, adding that the new rule merely
formalized a process that banks previously performed one-on-one.
Given the number of professional investors going short on Brazilian bonds,
many agreed the move was inevitable. "The system is sort of breaking down
right now," said one trader. He noted that Argentine FRB's were also being
heavily shorted, and could be subjected to similar moves in the future.
-By Thomas Catan; (201) 938-2225; thomas.catan@cor.dowjones.com |
