Shhhh! Be very, very quiet. The Isda Determinations Committee has been meeting to decide whether there’s been a restructuring Credit Event that would trigger payouts on CDS referencing Greece and we don’t want to spook them.

Or as the WSJ put it:

Hushed Up: Secret Panel Holds Fate of Greek CDS

Actually the result of the secret panel is publicly available. The “NO” votes have it:

15 “NO” votes -

Bank of America Merrill Lynch
Barclays
Credit Suisse
Deutsche Bank AG
Goldman Sachs
JPMorgan Chase Bank, N.A.
Morgan Stanley
UBS
BNP Paribas
Societe Generale
Citadel Investment Group LLC
D.E. Shaw Group
BlueMountain Capital
Elliott Management Corporation
PIMCO

This was concerning whether the effective subordination of Greek bonds to the bonds held by the ECB constituted a credit event. The above means no credit event on this basis, so the $3.25bn of Greece CDS will remain outstanding and untriggered for now.

As FT Alphaville reported earlier today, there was another potential restructuring credit event question put to the DC that pointed to the threat to use collective action clauses — as recently inserted into the bonds by new legislation — to encourage participation in the Greek bond swap. We were not so sure that one would hold water either and indeed it didn’t, the DC also voted it down.

Interestingly, it looks like they went, “hey, well, seeing as we’re all here, wanna just get this one out of the way to so that we can go and enjoy the weekend?” Usually there’s a step where they agree to have a meeting over it, and then there’s the actual meeting. We weren’t sure that the one that came out today would even make it the meeting part. But it did, no trigger, time to enjoy the weekend.

But why the seeming trigger happiness by market participants? What’s all the fuss about? If the CACs are used, a credit event will almost certainly be called. A CAC is “binding on all holders” if there are enough votes in favour. Why not just take a chill pill and wait?

Well, FT Alphaville thinks this has to do with concern about the outcome of the auction that will determine the actual payouts on the CDS contracts. The outcome will depend on what bonds are deliverable into the auction, and the bonds outstanding as we write this won’t all exist after the bond swap and/or CAC. In fact, it might be that none of the Greek-law bonds exist. And what about the English-law bonds? Where are those trading? Are they trading in line with the losses that the Greek-law bondholders have experienced?

Some major dealer banks have been playing this down and people will have a giggle at the WSJ’s rather unfortunately-worded headline. Now, FT Alphaville has written posts about why we think the Isda Committee process is indeed conflicted, and we encourage you to think about it from the perspective of buyside firms, and other clients, rather than dealer banks. Also think about how incredibly important it is for major dealers, and Isda, to present a united front, “nothing to see here, move along, all of this works exactly how we thought it would.” Politicians are after this market. It has to be seen to work.

Take a moment for this part of the WSJ piece:

However, ISDA committees rarely elaborate on decisions. Providing an explanation would slow the process, and in most cases the reasons are obvious, Mr. Pickel [Isda's chief executive] said.

But that isn’t always the case. In 2011, hedge fund firm Aurelius Capital Management argued that the CDS on a unit of Texas power giant Energy Future Holdings should be triggered after the company said one of its affiliates was insolvent. The ISDA committee decided against it and provided an explanation of around 70 words, saying only there was no evidence that company had met the industry definitions for insolvency.

Mark Alexandridis, a managing director at First Principles Capital Management, which has roughly $8 billion of fixed-income under management, said CDS markets “would benefit from a majority opinion that outlined the rationale.” That, he said, would “provide guidance on how the committee approaches decisions.”

Next, if you want to better understand Aurelius’ frustration, read the letter they sent to Isda. It reads a like someone who’s hopeful that they can make up with the ex, “we just want to know WHY [you don't think it's an insolvency]? Please, love you, bye, hope to see you around, wink, wink.”

Anyway, here’s Aurelius’ intro to a bunch of evidence they provide about how they think Texas Competitive Electric Holdings Company (an indirect wholly owned subsidiary of Energy Future Holdings Corp) is insolvent (emphasis ours):

Although determinations of insolvency can be challenging, we believe this one is straightforward. Simply put, there is overwhelming evidence that TCEH is insolvent. The items discussed below are the most straightforward and publicly observable indicia of insolvency, but we do not believe that any responsible financial analysis would indicate that the TCEH is solvent.

The first section thereafter starts with “TCEH Has Admitted Insolvency”. And there’s this bit that does a bit of pleading about why they think this is important (emphasis theirs):

While it may be tempting to side-step that task [of determining "insolvency"] through some expedient, we are confident the Committee appreciates the importance of evaluating this request fully and fairly, and providing transparency to the market as to the Committee’s conclusions and reasoning. The insolvency Credit Event is a clear term of the contractual relationship between protection buyer and protection seller, and it deserves to be honored no less than any other Credit Event. The financial markets depend on respect for contract rights, and the CDS market is no exception.

Moreover, side-stepping the insolvency Credit Event could jeopardize the regulatory capital of many regulated financial institutions.

That is one unhappy end-user.

We wonder how end-users will come out of this one. And we wonder whether Isda and dealers will succeed in convincing everyone that everything in the sovereign CDS market is working out just fine. Just how it was always meant to in fact.

Related links:
Greece CDS: trigger happy – FT Alphaville
Will the Greece CDS auction be ‘fair’? Part 1, Part 2 – FT Alphaville
Market prepares for Greek CDS trigger – IFR
Greek auction result could undermine CDS use – Risk
How do credit event auctions work? [Series] - FT Alphaville