Why are London’s lawyers thumbing the below section of the 2003 Isda definitions?
Because the prospect of a Greek debt restructuring has thrown up all sorts of questions for buyers and sellers of sovereign CDS. One of those is the above deliverables issue — with some in the market worried that the physical settlement process most commonly used in settling so-called CDS ‘credit events’ could be knocked on its side if the characteristics of Greek bonds were voluntarily altered.
Under Isda’s definitions for restructuring and CDS contracts, a restructuring has to occur in a form that “binds all holders” — which means a soft restructuring (reprofiling) would be unlikely to fulfil the requirement. That uncertainty has some market participants questioning the intrinsic value of CDS.
So if you take away anything from the current debate over the Greek CDS trigger, it should be the youthfulness of the sovereign CDS space. One of the few modern templates (i.e. after Isda published its credit definitions) for a payout of sovereign CDS took place in Ecuador. That, however, was a fairly straight-forward default — and not a sovereign restructuring as might be the case in Greece.
Still, it’s worth pointing out that CDS are privately-negotiated contracts and Isda is effectively one big lobby group with a deep interest in the swaps functioning as expected — that is, providing protection for loss on underlying debt. If something happens in the CDS market with Greece, and the market doesn’t like it, Isda can change the terms. And you can bet their own lawyers have been looking into this issue.
Isda, incidentally, has displayed its canny err, flexibility, a few other times.
From some old Bank of America notes:
Or as one market participant told us — there’s nothing a little supplement can’t fix.
Greek debt talks cast doubt over sovereign CDS – FT
Avoiding Greek credit event questions CDS value – Chris Whittall, IFR
ESM panic! Subordination, restructuring, CDS, oh my! – FT Alphaville