The derivatives industry has been up in arms over this little footnote that spans pages 22 and 23 in the new Dodd-Frank-inspired CFTC rules, Core Principles and Other Requirements for Swap Execution Facilities. Click the images to read:
The European Commission has been investigating goings-on in the CDS world since Deutsche Borse and CME tried to enter between 2006 and 2009. The commission today said it’s reached a preliminary conclusion that — deep breath — ISDA, Markit, Bank of America Merrill Lynch, Barclays, Bear Stearns, BNP Paribas, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JP Morgan, Morgan Stanley, Royal Bank of Scotland, and UBS all infringed EU antitrust rules. Deutsche and CME tried to get in and were denied exchange trading licences by ISDA, Markit, and the banks, says the commission.
From the statement (our emphasis):
Brussels, 1 July 2013
Antitrust: Commission sends statement of objections to 13 investment banks, ISDA and Markit in credit default swaps investigation
How many different types of risk can you name?
Operational risk, market risk, liquidity risk, legal risk, credit risk, etc. Now, let’s add “Isda risk” (pronounced Izzz-dah risk, it has the added benefit of making one’s risk manager sound like a rapper, which hopefully we all can agree is hilarious):
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
The credit derivatives industry has gone through the mother of all clean-ups over the last four years. It has standardised. The build-up of redundant contracts has been kept down. Hell, people even know which counterparties they are facing these days!
To make it even easier, there are quite specific rules to deal with various mechanics. Is it time to give the industry a pat on the back for a job well done? Read more
“Synthetic credit portfolio”. That’s the book where the $2bn in mark-to-market losses took place for JP Morgan, according to an announcement made on Thursday. A result which has now cost them a their AA- rating from Fitch and landed them on negative outlook with S&P, as announced late on Friday.
FT Alphaville has analysed the credit trades that might be in that portfolio, in an attempt to reason through what may have gone on. The fact, however, remains that we know precious little. Why is that? Is this acceptable that after the financial crisis that this can happen to a bank, let alone a systemically important one like JP Morgan? 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
We’ve been curious for a while about the media.comment blog at the International Swaps and Derivatives Association, which declares its mission thus:
media.comment addresses mainstream business and financial media coverage of the derivatives industry. Our hope is that media.comment will help lead to a more informed debate and understanding of the OTC derivatives markets for all our audiences. Reader thoughts and ideas are welcome. 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
Has Greece CDS been triggered? The question’s finally been posed to Isda’s determination committee and is currently pending:
Law firm Clifford Chance must be tired of fielding questions about what would happen to derivatives contracts should one’s eurozone counterparty exit the single-currency. So much so that they’ve put a document together covering 20 of what we imagine have been the most frequently asked questions.
FT Alphaville has waded through the legal mists, guided by Clifford Chance, to give you a bit more
pedantic detail than “it depends”. 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
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
In Part one, FT Alphaville asked whether there was reason to doubt the netted derivatives exposures reported by banks. Here, we discuss how netting works (or doesn’t, ahem) when counterparties collapse.
Valuing swaps when the world is crumbling Read more
On Friday, Jeffrey Snider of Atlantic Capital Management argued that finance now exists for its own exclusive benefit. The thrust of his argument is that derivatives have allowed banks to escape the bounds of actual cash assets and the real economy.
He introduced his argument by dissecting Bank of America’s derivatives disclosure, pointing out the distance between the net derivative asset that is reported ($79bn) and the market value of said asset before netting ($2,172bn). From there he goes on to marvel at the size of the derivatives market, and question whether there’s any good reason for it to be so big. Conclusion being as above: it’s so big that the link to the real economy is more or less gone. 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
Royal Bank of Scotland was penalised $1.9m on Tuesday, after it placed below-market prices in an auction among 13 credit default swap dealers, reports the FT. The auction was held to ascertain the value of debt issued by Dynegy, which recently filed for bankruptcy. RBS was assessed the charge after its offer price on $5m of Dynegy bonds was 31.5 basis points or 31.5 cents on the dollar for the debt. Other banks provided offer prices ranging from 69.63bp to 72bp, according to the results published on CreditFixings.com, a website run by Creditex and Markit Group, who administered the auction on behalf of the International Swaps and Derivatives Association.
Fitch Ratings has backed calls to reform the sovereign CDS market following the voluntary deal for exchanging Greek bonds proposed last month, reports the FT. The ratings agency says the voluntary agreement by bondholders on Greek sovereign debt, which avoided triggering a credit event, means the settlement of CDS on sovereign countries requires clarification. “It would seem that the use of the restructuring credit event generally and the nature of the language employed should probably be revisited,” the agency says in a report to be released on Monday.
The Depository Trust and Clearing Corporation, and representatives of trade association Isda, have stated on several occasions that 98 per cent of all credit derivatives outstanding are recorded in the Trade Information Warehouse that the former organisation runs. For an initiative that is all about transparency, it struck us as odd that it’s so difficult to find out how they determine that number.
FT Alphaville’s theory, outlined on Friday, was that it came from some of the surveys which measure the overall size of the credit derivatives market. This turned out not to be true. Our readers helpfully provided some of their own theories too. Read more
It’s a claim that is often made by representatives of the International Swaps and Derivatives Association and of The Depository Trust and Clearing Corporation that 98 per cent of all credit derivatives outstanding are recorded in the latter organisation’s Trade Information Warehouse.
It’s a comfort to know that data on nearly all such derivatives are stored in a single place, where the public can glance into the normally opaque over-the-counter world and regulators can have a proper dig if they want to. Read more