The nationalisation of the fourth largest bank in the Netherlands is proving to be a pain for the credit derivatives market. It’s only by virtue of the small number of contracts outstanding that referenced SNS Bank that this hasn’t been making more headlines and causing more consternation.
The Isda Determinations Committee has already declared that the expropriation of the subordinated debt of the bank was a restructuring credit event, and that there might be some auctions to determine payouts under the swaps. But it looks like that result of the auctions could prove a bit farcical, with buyers of protection walking away with very little compensation for the total loss experienced by subordinated debt holders. Read more
We’re confused about the restructuring credit event that the Isda determinations committee voted for on Wednesday. It took them three meetings to do it, and Bank of America Merrill Lynch doesn’t agree, but there you go.
Oh, and the Q&A document that Isda published about CDS written on Greece has a line that appears to be in contradiction to decision, but there you go… Read more
SNS Reaal’s sub expropriation was a restructuring credit event after all, according to 14 of the 15 Isda determinations committee members on Wednesday:
Oh boo, the committee that decides on whether credit default swap contracts should payout appears to be having trouble reaching a conclusion about whether the nationalisation of SNS Bank counts as a “credit event”. While the quantity of swaps that hang in the balance is teeny tiny, the issue itself is a big deal because it reveals some of the problems that might crop up in future bank rescues and bail-ins of debt while demonstrating yet again that CDS don’t appear to do what a reasonable person would think they do. Read more
There can’t be many credit default swaps written on freshly nationalised SNS Bank. It isn’t among the publicly reported top 1000 single-entity CDS published by DTCC.
Nonetheless the question of whether the Dutch government’s expropriation of SNS subordinated debt constitutes a credit event, triggering payouts on the derivatives, is being debated on Tuesday by the Isda Determinations Committee, which serves as the ultimately arbiter in such cases.
By which we mean, they are debating it again — they decided the first time around to defer the question to get more information or something.
But why should anyone care about some contract that so few parties have an interest in?
Some possibilities below. Mentally circle any that apply. Read more
Credit event auctions determine the amount paid out by credit default swaps when the company or sovereign referenced by the swap defaults. As such, the auction process is a vitally important part of the CDS market. Evidence from an academic paper, penned by Haoxiang Zhu and Songzi Du of the Graduate School of Business at Stanford University, suggests that these auctions are systemically biased.
In Part 1 of our overview of the study, FT Alphaville gave a brief refresher on how auctions work as well as the intuition behind the source of the potentially in-built bias in credit event auctions. Here we get a bit more into the guts of the paper, describing some of its exact findings. We also review some of the descriptive statistics of their dataset. Read more
A week has passed since the auction for Greek CDS. Perhaps it’s now time to reflect on the credit event process. Toward that end we wanted to share our thoughts in a combined derivatiViews and media.comment post, and we also encourage our readers to offer their views.
That was from Isda’a media.comment blog, in an entry posted on Wednesday. Excellent timing really, because FT Alphaville has a view to offer on credit event auctions. Read more
The maximum amount that could have potentially settled in the Greece CDS credit event auction on Monday, as DTCC repository data that has just been released shows, was $3.1bn — not $3.2bn, as was widely reported.
This means that the maximum potential payout to credit default swap protection buyers, given that the final price in the auction was 21.5, was $2.4bn — not $2.5bn, as was widely reported. Read more
The Greece CDS auction is over!!
The final price for Greek bonds was set at 21.5, meaning that every buyer of $10m CDS protection on a default of the Hellenic Republic can expect a payout of $7.85m cash. Full results here and this is the headline: Read more
The actual amount of net notional that settles in the Greece CDS auction on Monday isn’t going to be $3.2bn.
That $3.2bn has been the amount that’s been reported far and wide — including by us on several occasions — and it isn’t correct, and we want to own up. Read more
FT Alphaville has already described how sovereign restructuring credit events are not exactly run-of-the-mill in credit default swap land.
Furthermore, the “restructuring” in “sovereign restructuring” means that Greece CDS contracts might not do us the courtesy of quietly being closed out and dying, even though a credit event has officially been declared by the Isda Determinations Committee last Friday. Read more
On Monday, we’ll finally know what amounts will be paid out to those who bought credit default swap protection on Greece, following last week’s credit event.
Which means it really is worth knowing how the payouts will be derived. In short though, they will be determined by the results of an auction to find the recovery price of old Greek bonds. This particular auction promises to be extra exciting because Greek bonds are a rather diverse bunch of assets. Much more on this shortly. Read more
[Twiddles thumbs, waits for Isda to announce whether there's been a credit event on Greece...]
There’s a bit of an oddity in the pool of CDS trades on Greece. To understand it, we need to explain a bit to you about credit events, auctions, and the trading conventions on them. What it boils down to, is that it looks like someone booked some trades that go against the norm. Read more
An initial roundup of the PSI commentary out this Friday morning.
First off Standard Chartered’s Sarah Hewin, who thinks Isda might call a credit event: Read more
What, not dramatic enough for you?
Well, then, how about an 18-page list of potentially deliverable bonds? This could come in useful if — and this is only a hypothetical, you understand — the Isda Determinations Committee were to be requested to rule on whether a restructuring credit event had occurred with reference to Greece because of the use of collective action clauses to force holdout creditors into the bond swap. Read more
FT Alphaville is starting to feel a bit bemused at the level of outrage expressed around
town the globe on the behalf of those poor buyers of credit default swap protection on Greece. But, here’s a question: are they deserving of your pity? And who are they?
The situation at present is that there have been a couple of attempts to get the Isda Determinations Committee to declare a credit event. After a credit event is triggered, and it looks likely that it will be next week if collective action clauses are used in order to get maximum participation in the Greek bond swap, there will be an auction, again organised among dealers coordinated by Isda. Read more
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: Read more
Jeez, guys, look, there’s going to be a credit event that triggers Greece CDS, ok? Or, at least, it seems highly likely. So, take a chill pill.
What, you don’t want to? Instead you want to submit another request to the Isda Determinations Committee to try to trigger the contracts? Fine, have it your way (click to expand): Read more
ISDA Determinations Committee Accepts Question
Related to a Potential Hellenic Republic Credit Event Read more
The use of collective action clauses in Greek bonds, as part of the country’s sovereign restructuring, seems set to trigger credit default swaps. For the $3.2bn of net notional still outstanding on the contracts, it’s been a long road to a credit event.
In Part 1, FT Alphaville discussed how the next point of focus will be the performance of the auction that will determine the payout to protection buyers of the contracts. Read more
Are you feeling relieved that the whole CDS trigger debate for Greece might be over? Well, you may have been relieved too soon. There may well be a big, nasty hitch.
A hitch involving how the credit event auction for Greece — where CDS payouts are determined — works. Read more
It appears that the “voluntary” Greek bond swap might finally come to an end.
Time then to spare a thought for the derivative that drove the need to draft the damn thing so gently in the first place. Ladies and gentlemen, FT Alphaville gives you the incredible shrinking market for credit default swap contracts written on Greece! Read more
Since 2009 credit event auctions that determine credit default swap payouts have been hardwired into the operations of the market. Previously, auctions were arranged on a more ad hoc, voluntary basis.
Potentially billions hinge on the outcomes of this automatic mechanism. By eliminating voluntary participation, and by virtue of dealing with something as complicated as debt, both credit events and the auctions that follow have been subject to the occasional controversy. Read more
Credit event auctions determine what the ultimate payout is when credit default swap contracts are triggered by a “credit event” such as bankruptcy.
In a previous post, FT Alphaville explained why such auctions came to exist. Here we discuss why auctions were so important in helping the market grow to astronomical heights, particularly with regards to index trading, a segment that continues to boom. Read more
Credit event auctions are the means by which final payouts on credit default swap contracts are calculated. The importance of such auctions will increase as more and more defaults occur in the face of a global economic slowdown.
To the extent that CDS are used to hedge, rather than speculate, the outcomes of these auctions will dictate how effective the hedge has been. Read more
The International Swaps and Derivatives Association has a list of journalists who’ve been naughty or nice. They write about them on their Media Comment blog here.
Given FT Alphaville’s previous post about the Isda-organised Determinations Committee, which rules on behalf of the entire industry on whether credit derivatives will pay out, we’d like to make a few more points to address at least some of the possible counter-arguments. (To be clear: the quote boxes below display our versions of putative counter-arguments.) Read more
Imagine playing a game where you bet on the outcome of a certain event. Most of the time the final outcome is unambiguous: you play, and afterwards, it’s clear whether you won or you lost. But every now and then, the result is hazy. Did the ball go into the goal? Was there a handball? Did he reach base?
This is usually where a referee steps in to decide. Read more
In which we attempt to explain the complexities at the heart of the CDS trigger debate…
Debt is nothing more than a financial relationship between two parties, whether individuals or institutions. Just as it is with relationships, debt can often be complicated. This fact makes it rather unfortunate that derivatives have been written on some $27,700bn of worth of complicated debt relationships. Read more
The effectiveness of derivatives to insure against companies defaulting on debt is to be tested in a benchmark case involving the Italian directory company Seat Pagine Gialle, says the FT. The industry body overseeing the multi-trillion dollar market for credit default swaps has been forced to refer a decision on whether the Italian company had defaulted to external review after heated complaints from hedge fund investors. It is only the second time the committee of International Swaps and Derivatives Associationthat adjudicates on CDS disputes has been unable to reach a consensus. The ruling by an external group of independent experts will take several weeks to reach a decision.
The International Swaps and Derivatives Association has been rather busy lately. In case you haven’t noticed, they’ve been on the public relations offensive, taking notes and calling out what they see as bad reporting, or even bad semantics.
They’ve also had a rather pivotal change in personnel. And this Tuesday they announced their latest study on losses that banks took from exposures to monolines. Read more