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Savings Experiment: Snow RemovalWhat a crazy world! Dealers in Europe canceled 6,850 contracts linked to Thomson SA, amounting to $16 billion dollars.
What happened to cause this? It all started when Thompson SA deferred payment on $72.5 million repayment on its 6.05% privately placed notes. This set off an immediate firestorm. As of August 14, traders bought 11,000 individual swaps contracts valued at $2 billion dollars.
Thompson called this move a "restructuring credit event." Thomson is trying to reorganize 2.8 billion euros ($4 billion) of debt to avert bankruptcy. This term is important as it was not an outright default. In these cases where repayment is deferred, a ruling must be made on whether or not the event is a restructure or an outright default.
Banks went bananas, buying and selling so many swaps that there were duplicates all over the place.
As in the US, Europe is trying to force swaps transactions onto trading platforms or clearinghouses. In order to clean up the mess, clearing houses such as Tri Optima of Stockholm decided to tear up redundant contracts.
Contracts tied to Thompson SA were quoted at 26.2% upfront and 5% a a year, according to CMA DataVision. It costs 2.62 million euros in advance and 500,000 euros a year to protect 10 million euros of the company's debt.
With banks in the US holding trillions of dollars of swaps "off their books,", it would be sensible if regulators would do the same thing, namely tear up all the redundant contracts to compress the amounts outstanding.
Should regulators force banks and financial institutions to tear up their redundant swaps contracts?
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