ISDA to begin biggest revisions to credit swaps since 2009

Changes spurned by Greece's debt problems

Stopwatch, Change Stopwatch, Change

May 9 (Bloomberg) -- Credit-default swaps market leaders will meet this week in New York and London to discuss changes to the contracts in what may be the biggest revisions since 2009.

The International Swaps and Derivatives Association’s credit steering committee will meet May 11 to discuss changes, said Steven Kennedy, an ISDA spokesman. Possible amendments to standard contracts, which are governed by ISDA, include how debt-for-equity exchanges would be treated after a bankruptcy, specifying that credit swaps only cover losses from defaults that occur after their purchase, and clarifying how the date of a so-called credit event is determined, according to people familiar with the situation.

The committee is considering the changes after Greece’s debt restructuring posed the biggest test for the $26.5 trillion credit swaps market since banks including JPMorgan Chase & Co. created it more than a decade ago. ISDA, based in New York, last overhauled thederivatives three years ago in the so-called Big Bang and Small Bang protocols that created a new set of standards to increase transparency and confidence in the market.

While the Greek restructuring was “scary” and a one-time situation, politicians sought to avoid triggering the contracts because “the ramifications were too great,” said Sabur Moini, a money manager who helps oversee about $2.5 billion of high- yield assets at Los Angeles-based Payden & Rygel. The changes will help to close loopholes and shift credit-swap trading onto exchanges or similar systems, he said.

Greater Transparency

“It’s a good hedging instrument and once they formally trade on exchanges, more investors will have faith there’s greater transparency and I can get out of these things if things get ugly,” he said in a telephone interview.

The meeting will begin the formal process of revamping the contracts by collecting proposed changes from the members, said the people, who asked not to be named because the discussions are private. Any changes must be approved by users of the existing contracts because the changes will apply to those trades already executed, they said. More than 2,000 banks, hedge funds and other asset managers in the credit-swaps market in 2009 agreed to adopt the ‘Big Bang’ protocol.

One possible change includes fixing a flaw in the contracts that can leave buyers with only part of their losses covered from a sovereign debt restructuring, Kennedy said earlier this week.

Next page: Fixing Flaws

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