It is understood that the FSA’s investigation is part of a wider review of insider dealing practices, however it marks a new frontier in the regulator's battle against trading on illegal tips, which had previously focused on the buying and selling of shares.
Ian Mason, regulatory partner at law firm Baker & McKenzie said that a company that could not pay its debts would be able to buy credit default swaps against that organisation and reap huge profits when the default occurred. “Generally, the FSA has focused on equities but this is spreading the net a bit more widely,” he said.
The FSA has never brought a prosecution over the use of derivatives such as CDS to facilitate insider trading.
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