ISDA Text: Ultimate Decision on CDS Credit Events by Comte
–At This Point, Does Not Appear Greek Debt Deal a CDS Credit Event
NEW YORK (MNI) – The following was issued Monday afternoon by
the International Swaps and Derivatives Association:
The International Swaps and Derivatives Association, Inc. (ISDA)
today issued the following statement in order to ensure an accurate
understanding of how credit events are determined for credit default
swaps contracts. Today’s statement is intended to underscore key points
articulated in the Greek Sovereign Debt Q&A, updated on October 31,
which discussed this issue with regards to the Eurozone proposal for
Greek debt. Some media accounts of the information contained in the Q&A
inaccurately described the credit event process.
The determination of whether a credit event occurs under CDS
documentation is made by the relevant ISDA Determinations Committee
(DC), which consists of 10 sell-side and five buy-side firms. ISDA
serves as secretary to, but does not sit on, the DC. A supermajority of
votes (12 of 15 DC members) is required to find that a credit event has
occurred without the decision being subject to external legal review. A
weaker majority decision would be subject to external legal review that
might overturn such a determination.
The DC’s review of a potential credit event comes after a proposal
has been announced and its final terms are publicly available and only
if a market participant requests the DC to take up the matter. Neither
of these has yet occurred with regards to the Greek sovereign debt
situation. No debt issued by the Hellenic Republic has been modified to
date, nor have the formal terms for any such modification under the
Eurozone proposal yet been released. No market participant has yet made
such a request to the DC.
When the DC does review a situation to determine whether a credit
event has occurred, it does so using publicly available information and
according to the terms of the ISDA Credit Derivatives Definitions. The
Definitions specify that for a credit event to occur, a restructuring
must be binding on all holders of a particular bond or loan.
Based on what we know now, it appears from news reports that the
Eurozone proposal involves a voluntary exchange that would not be
binding on all holders. As such, it does not appear to be likely that
the Eurozone proposal will trigger payments under existing CDS
contracts. However, whether or not it does so will be decided by the DC
on the basis of the specific facts, if a request is made to them.
More information on the credit event process and the ISDA
Determinations Committee is available in the Greek Sovereign Debt Q&A at
on the ISDA website and on the Determinations Committee section of
ISDA’s website at http://www2.isda.org/determinations-committees/.
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