ISDA has prepared this brief summary of frequently asked questions to assist in your consideration of the 2009 Smurfit CDS Protocol (the “Smurfit Protocol”).
THIS FREQUENTLY ASKED QUESTIONS DOES NOT PURPORT TO BE AND SHOULD NOT BE CONSIDERED A GUIDE TO OR AN EXPLANATION OF ALL RELEVANT ISSUES OR CONSIDERATIONS IN CONNECTION WITH THE SMURFIT PROTOCOL. PARTIES SHOULD CONSULT WITH THEIR LEGAL ADVISERS AND ANY OTHER ADVISER THEY DEEM APPROPRIATE PRIOR TO USING OR ADHERING TO THE SMURFIT PROTOCOL. ISDA ASSUMES NO RESPONSIBILITY FOR ANY USE TO WHICH ANY OF ITS DOCUMENTATION OR OTHER DOCUMENTATION MAY BE PUT.
This Frequently Asked Questions webpage is divided into three sections: (i) questions relating to the submission of Adherence Letters; (ii) questions relating to the election of an entity not to participate in the Smurfit CDS Protocol; and (iii) questions relating to the substance of the Smurfit CDS Protocol itself.
Adherence Letter Submission Process
When do I need to send in my Adherence Letter?
The Smurfit CDS Protocol is open between 9:00 a.m. New York Time on Wednesday February 11, and 5:00 p.m. New York Time on Tuesday, February 17, 2009. Any entity must email its Adherence Letter to ISDA by 5:00 p.m. New York Time on Tuesday, February 17, 2009, or it will not be able to participate in the Smurfit CDS Protocol.
How do I send in my Adherence Letter?
All Adherence Letters must be delivered by email to SmurfitProtocol@isda.org. In the email, you must submit both your conformed and executed copies of the Adherence Letter. Click here for a sample of a conformed letter. Click here for a sample of a signed letter.
The Adherence Letter(s) should be on your institution’s letterhead. Nothing in the form Adherence Letter available on ISDA’s website may be changed with the exception of completing the details of your institutional name, date and signature block.
You are not required to send your original Adherence Letter(s) by mail to ISDA.
What is a conformed copy?
A conformed copy of the Adherence Letter means that the name of the authorized signatory (for example, Patricia Smith) is typed rather than having Patricia Smith’s actual signature on the letter. ISDA only posts on its website the conformed copy of all Adherence Letters.
You must also submit an executed, or signed, copy of the Adherence Letter in addition to the conformed copy of the Adherence Letter. ISDA keeps the executed copy of the Adherence Letter for its files and does not share the executed copy with anyone else.
Who is an authorized signatory?
An authorized signatory to the Adherence Letter is an individual who has the legal authority to bind the adhering institution.
What if I am an investment or asset manager – how do I complete the signature block?
If you are an investment or asset manager and act on behalf of multiple funds that have entered into covered transactions under the Smurfit CDS Protocol, you may adhere on behalf of all of those funds by indicating the following in the signature block: “Investment/Asset Manager, acting on behalf of the funds and accounts listed in the relevant Master Agreement between it and another Adhering Party” Click here for example. A separate Adherence Letter for each fund or account does not need to be submitted to ISDA. Further, no specific names of clients of the investment/asset manager will be publicly disclosed on the ISDA website in connection with the Smurfit Protocol.
As an alternative, an investment or asset manager may list the specific funds that are adhering to the Protocol, by indicating in the signature block: “Investment/Asset Manager, acting on behalf of the funds and accounts listed below”. Click here for example. Please note that in this case the names of those funds will be publicly disclosed on the ISDA website.
Whichever method is used, in order for Physical Settlement Requests to be calculated by Participating Bidders, each such investment/asset manager is required to provide a list of all funds and accounts that it acts on behalf of to each Participating Bidder that has (or whose affiliate has) entered into a Master Agreement with any of those funds or accounts. As provided in paragraph (1) of the Auction Methodology set out in Exhibit 3 of the Smurfit CDS Protocol, on the Business Day prior to the Auction Date, the Administrators (Markit and Creditex) will publish a list of the Participating Bidders on their respective websites. In addition, contact details will be available for the Participating Bidders through their Adherence Letters on the ISDA website.
Can I change the text of the Adherence Letter?
No. The Adherence Letter must be in the same format as the form letter published in the 2009 Smurfit CDS Protocol. You may obtain a copy of the form Adherence Letter by visiting the ISDA website, www.isda.org and clicking on “2009 Smurfit CDS Protocol” and then clicking on “Form of Adherence Letter”.
Do I need to reference a DTCC number on the Adherence letter? What are the implications if I do not?
You are strongly encouraged to provide the DTCC number for operational efficiency, but you are not required to provide the number.
Does it cost any money to adhere to the Smurfit Protocol?
Entities Electing Not to Adhere to the Smurfit CDS Protocol
What happens if my institution or fund does not adhere to the Smurfit Protocol?
If your institution or fund elects not to participate in the Smurfit Protocol, then you must bilaterally settle each of your trade(s) with each of your counterparties as such trade(s) relate to Smurfit. You will not be able to take advantage of the auction mechanic and should contact your counterparty or counterparties immediately if you do not plan to participate in the Smurfit Protocol.
Scope of Transaction Coverage Relating to the Smurfit Protocol
Does adhering to the Smurfit Protocol affect my single name trades?
Yes. Senior single name CDS trades will be part of the auction process provided for by the Smurfit Protocol. Thus, senior single name CDS trades on Smurfit will be subject to the procedures set forth in the Protocol.
Does adhering to the Smurfit Protocol affect other credit derivative transactions?
Yes. In addition to single and index credit derivative transactions referencing Smurfit, the following transactions are also covered in the Smurfit Protocol: Constant Maturity Swap Transaction, a Principal Only Transaction, an Interest Only Transaction, First to Default Transaction, Nth to Default Transaction, Recovery Lock Transaction, Bespoke Portfolio Transaction (which term would include portfolio transactions relating to TRAC-X, JPMorgan HYDI and Tracers indexes), Single-Name Swaption and Portfolio Swaption.
What credit derivative transactions are not affected by adhering to the Smurfit Protocol?
Reference Obligation Only Transactions, Loan Only Transactions, Preferred CDS Transactions and Fixed Recovery Transactions are not covered under the Smurfit Protocol. Subordinated CDS transactions are also not covered under the Smurfit Protocol.
Who runs the auction?
The auction will be administered by Creditex and Markit and not by ISDA.
When is the auction?
The auction will take place on February 19, 2009. Details of the auction results will be posted at www.creditfixings.com.
Physical Settlement through the Auction
I want to physically settle through the auction. What do I have to do?
Parties who wish to deliver or receive Deliverable Obligations may place a Physical Settlement Request with a Participating Bidder. A Physical Settlement Request is an order to sell or buy Deliverable Obligations at the Final Price. Any customer that wishes to submit a Customer Physical Settlement Request to a Participating Bidder must submit a valid Customer Physical Settlement Request Letter to the relevant Participating Bidder on or prior to 5:00 p.m. New York time on the Business Day prior to the Auction Date. Following the auction, parties who submitted a Physical Settlement Sell Request must send a Notice of Physical Settlement to the relevant Participating Bidder, specifying which Deliverable Obligations they will deliver. A form of the Notice of Physical Settlement is contained as an exhibit in the Protocol document. The deadline for sending this notice is specified as the "Notice of Physical Settlement Date" in the Protocol.
If I want to deliver Deliverable Obligations in a currency other than USD, how is the FX calculated?
All Physical Settlement Requests and Limit Order Submissions are denominated in USD, however for trades generated by the matching of these orders, Deliverable Obligations denominated in certain other currencies may be delivered. In this case, the FX rate used to calculate how much of the non-USD Deliverable Obligation may be delivered is determined by the Calculation Agent using the Federal Reserve Bank of New York 10:00 a.m. (New York time) mid-point rate as displayed on Reuters Page FEDSPOT on the date the Notice of Physical Settlement is effective (or, if the Notice of Physical Settlement is changed on or prior to the Physical Settlement Date, the date notice of the last such change is effective), or in such other commercially reasonable manner as it shall determine after consultation with the parties.
Cash Settlement Date and Accruals
When is the Cash Settlement Date?
The Cash Settlement Date is expected to be February 26, 2009.
How are accruals calculated?
Depending on the timing of the auction settlement process relative to standard payment dates for CDS contracts, accruals are calculated and settled using either a "stub accrual" methodology or a "full coupon and rebate" methodology. Please see below for the methodology applied to Smurfit and further explanation of these methodologies.
For Smurfit the "stub accrual' methodology will apply. Fixed Rate will accrue to and including the Common Event Determination Date, which is January 26, 2009.
Under the "stub accrual" methodology, the Fixed Rate in respect of the relevant Reference Entity accrues from and including the previous payment date (or the Effective Date if it is the first accrual period) to and including the Common Event Determination Date and the resulting Fixed Amount in respect of the relevant Reference Entity is paid on the Cash Settlement Date. For tranche transactions, the "resulting Fixed Amount" is the accrual on the loss amount or recovery amount incurred on the relevant tranche (if any).
The "full coupon and rebate" methodology is generally applied when a standard CDS contract payment date (the "Affected Payment Date") occurs after the Event Determination Date, but before the auction settlement process is completed. This reflects the same economics as the "stub accrual" methodology (i.e. Fixed Rate accrues to and including the Common Event Determination Date), but the payment mechanics are different in order to facilitate settlement. Under the "full coupon and rebate" methodology, the Fixed Rate in respect of the relevant Reference Entity accrues from and including the previous payment date (or the Effective Date if it is the first accrual period) to but excluding the Affected Payment Date for purposes of the payment due on that date (unless the transaction matures on that date), i.e. "full coupon" is paid on that date. However, a rebate of the Fixed Rate accrual in respect of the relevant Reference Entity for the period from and including the calendar day after the Common Event Determination Date, to but excluding the Affected Payment Date, will be added to the Cash Settlement Amount to be paid to Buyer on the Cash Settlement Date. For tranche transactions, the "Fixed Rate accrual in respect of the relevant Reference Entity" is the accrual on the loss amount or recovery amount incurred on the relevant tranche (if any). For avoidance of doubt, in the "full coupon and rebate" the accrual for the "full coupon" is calculated on the pre-event total recovery and loss whereas the rebate is calculated using the event loss amount or recovery amount incurred. If the relevant transaction matures on the Affected Payment Date, the accrual is to and including the Affected Payment Date, then the Fixed Rate and the rebate will accrue to AND INCLUDING the Affected Payment Date. Finally, please note that if the Affected Payment Date falls on a non-business day, then the end of the accrual period for purposes of the Fixed Rate accrual and the rebate will adjust to the following business day, EXCEPT where the transaction matures on the Affected Payment Date, in which case it does NOT adjust, pursuant to Section 1.6 of the 2003 ISDA Credit Derivatives Definitions.