ISDA says Republic of Ukraine credit default resolution in play

October 14, 2015 10:12 AM

The International Swaps and Derivatives Association, Inc. (ISDA) today announced that its EMEA Credit Derivatives Determinations Committee (EMEA DC) resolved that a Repudiation/Moratorium Credit Event and a Failure to Pay Credit Event have occurred in respect of the Republic of Ukraine.

The EMEA DC determined that an Auction will be held in respect of outstanding credit default swap (CDS) transactions on October 6, 2015.

Pursuant to the DC meeting statements published on September 28, 2015 and September 30, 2015, the EMEA DC agreed to effect an accelerated Auction process if such a Credit Event occurred. The EMEA DC is taking preparatory steps so that an Auction can be held and Representative Auction Settled Transactions can be settled, in each case prior to the deadline set by the Republic of Ukraine for bondholders to participate in the exchange offer and consent solicitation. 

There are two things that matter in determining a credit event. First, the decision can only be made based on publicly available facts submitted to the DC. Second, these facts need to be referenced to the ISDA Credit Derivatives Definitions – the standard legal terms used in the credit derivatives market – to determine whether a credit event has occurred. This makes the process objective and predictable as possible, and means that decisions can be made quickly – providing certainty to market participants as to whether the contract will proceed to settlement or not.

The DC membership is very broad, incorporating both buy- and sell-side firms, ensuring there’s a wide range of views. The DC comprises of 15 voting members: 10 from the sell-side and five from the buy-side. Their role is to apply the terms of market-standard credit derivatives contracts to specific cases, and make factual determinations on Credit Events, Successor Reference Entities and other issues, based on information provided to the DCs by credit default swap (CDS) market participants. The DCs are also responsible for determining whether a CDS Auction should be held following a Credit Event, in accordance with the Determinations Committee Rules.

According to the report of the Finance Ministry, Ukraine will impose a temporary technical suspension of payments of the eurobonds maturing in September and October in order to allow the completion of the debt restructuring.

"While this is not a formal announcement of a debt moratorium, we think it is possible that investors will turn to the ISDA Determination Committee to rule that this would constitute a moratorium," Sliusarchuk said.

"Importantly, in order for a CDS trigger to happen, a failure to pay event has to materialize as well – due on September 23 – but the date of the credit event would be backdated to the date of the moratorium. This could be relevant for CDS contracts expiring on September 20," she said.

Khramov predicts that payments on CDS, including securities that mature in September 2015, would be settled, as the Finance Ministry officially announced the debt restructuring.

ISDA acts as a non-voting secretary to each DC, and endeavors to co-ordinate this process in a transparent and operationally efficient manner. ISDA does not make the decision regarding if a credit event occurred or not.




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