Risk Disclosures Related to Credit Derivative Use by U.S. and German Corporate Bond Funds between 2004 and 2010 – An Evaluation

Abstract: This study aims to investigate whether the comments made by funds regarding their use of CDS in periodic fund reports are con­sistent with their disclosed CDS holdings. For several funds in the U.S., the po­tential losses that may arise from selling CDS protection are almost as high as their net assets and in Germany, this potential can be even higher. The results of the study suggest that the comments provided by funds about their use of CDS in periodic reports are often vague and sometimes misleading. For in­stance, in Germany, funds that use more short than long CDS often claim that they only use long CDS for hedging purposes. This means that investors may need to analyze portfolio holdings to learn about the true investment behav­ior of funds. Based on the results, it is advisable for regulators in both coun­tries to strengthen their monitoring activity and implement more standard­ized disclosure policies.

9th International Scientific ERAZ Conference – ERAZ 2023 – Conference Proceedings: KNOWLEDGE BASED SUSTAINABLE DEVELOPMENT, hybrid – online, virtually and in person, Prague, Czech Republic, June 1, 2023

ERAZ Conference Proceedings published by: Association of Economists and Managers of the Balkans – Belgrade, Serbia

ERAZ conference partners: Faculty of Logistics, University of Maribor, Maribor (Slovenia); University of National and World Economy – UNWE, Sofia (Bulgaria); Center for Political Research and Documentation (KEPET), Research Laboratory of the Department of Political Science of University of Crete (Greece); Institute of Public Finance – Zagreb (Croatia); Faculty of Tourism and Hospitality Ohrid, University of St. Kliment Ohridski from Bitola (North Macedonia)

ERAZ Conference 2023 Conference Proceedings: ISBN 978-86-80194-72-1, ISSN 2683-5568, DOI: https://doi.org/10.31410/ERAZ.2023

Creative Commons Non Commercial CC BY-NC: This article is distributed under the terms of the Creative Commons Attribution-Non-Commercial 4.0 License (https://creativecommons.org/licenses/by-nc/4.0/) which permits non-commercial use, reproduction and distribution of the work without further permission. 

Suggested citation

Galkiewicz, D. P. (2023). Risk Disclosures Related to Credit Derivative Use by U.S. and German Corporate Bond Funds between 2004 and 2010 – An Evaluation. In V. Bevanda (Ed.), ERAZ Conference – Knowlegde Based Sustainable Development: Vol 9. Conference Proceedings (pp. 147-154). Association of Economists and Managers of the Balkans. https://doi.org/10.31410/ERAZ.2023.147

References

Beretta, S., & Bozzolan, S. (2004). A framework for the analysis of firm risk communica­tion. The International Journal of Accounting, 39(3), 265-288. https://doi.org/10.1016/j.intacc.2004.06.006

CFA. (2011). User Perspectives on Financial Instrument Risk Disclosures under International Financial Reporting Standards (IFRS) (Volume 1), October. http://www.cfainstitute.org/ethics/documents/financial_instruments_risk_disclosure_report_volume_1.pdf

CFA. (2013). User Perspectives on Financial Instrument Risk Disclosures under International Financial Reporting Standards: Derivatives and Hedging Activities Disclosures (Volume 2), January.

Duffie, D. (1999). Credit Swap Valuation. Financial Analysts Journal, 55(1), 73-87. https://doi.org/10.2469/faj.v55.n1.2243 

FASB. (2009). ASC 815-10: Derivatives and Hedging (“Topic 815”).

Galkiewicz, D. P. (2014a). Similarities and Differences between U.S. and German Regulation of the Use of Derivatives and Leverage by Mutual Funds – What Can Regulators Learn from Each Other? Working Paper.

Galkiewicz, D. P. (2014b). Loss Potential and Disclosures Related to Credit Derivatives: A Cross-country Comparison of Corporate Bond Funds under US and German Regulation. SFB/TR 15 Discussion Paper, No. 494, Sonderforschungsbereich/Transregio 15 – Govern­ance and the Efficiency of Economic Systems (GESY), München.

Galkiewicz, D. P. (2016). Loss Potential from Credit Derivative Use by Corporate Bond Funds under U.S. and German Regulation – A Cross Country Comparison. Credit and Capital Markets – Kredit und Kapital, 49(2), 245-298.

Hodder, L., Koonce, L., & McAnally, M. L. (2001). SEC Market Risk Disclosures: Implica­tions for Judgment and Decision Making. Accounting Horizons, 15(1), 49-70. https://doi.org/10.2308/acch.2001.15.1.49 

Horing, D., & Grundl, H. (2011). Investigating Risk Disclosure Practices in the European In­surance Industry. The Geneva Papers on Risk and Insurance – Issues and Practice, 36(3), 380-413. https://doi.org/10.1057/gpp.2011.13 

Lajili, K., & Zeghal, D. (2005). A Content Analysis of Risk Management Disclosures in Cana­dian Annual Reports. Canadian Journal of Administrative Sciences / Revue Canadienne des Sciences de l’Administration, 22(2), 125-142. https://doi.org/10.1111/j.1936-4490.2005. tb00714.x

Malafronte, I., Porzio, C., & Starita, M. G. (2013). Disclosure Practices and Financial Crisis: Em­pirical Evidences in the European Insurance Industry. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.2374688 

Oehmke, M., & Zawadowski, A. (2017). The Anatomy of the CDS Market. Review of Financial Studies, 30(1), 80-119. https://doi.org/10.1093/rfs/hhw068 

Oppenheimer Champion Income Fund Lawsuits. http://www.youhavealawyer.com/blog/2009/04/16/ oppenheimer-champion-income-fund-lawsuits/, visited on September 8, 2012.

Recovering Oppenheimer Champion Fund Losses, http://www.oppenheimerfundfraud.com/id3.html, visited on September 8, 2012.

SEC Letter to the GCotICI. (2010). SEC, Letter to the General Counsel of the Investment Com­pany Institute: Derivatives-Related Disclosures by Investment Companies.

UCITS Directive 2009/65/EC/OGAW-Richtlinie 2009/65/EG: Richtlinie zur Koordinierung der Rechts und Verwaltungsvorschriften betreffend bestimmte Organismen für gemeinsame Anlagen in Wertpapieren (OGAW) (Neufassung), i.d.F. vom 13. Juli 2009, Amtsblatt der Europäischen Union L302/32-302/96.