Settlement

The important matter of settling credit derivative transactions is a high priority on ISDA’s agenda. Over the course of the past year, the Association has published a series of ad hoc protocols to deal with settlement of trades in individual credit events. Each of these protocols offered institutions the ability to amend their documentation for index trades and to close out their physical positions by utilizing the final price generated through an auction. In January 2006, discussions began in earnest to examine a broader move to alternative settlement arrangements for a range of credit derivatives, including, but not confined to, index trades. For the past six months, ISDA has been hosting a strict schedule of calls and meetings for all constituents of the credit derivatives community with the aim of arriving at consensus on such a move.

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Credit Derivative Templates

ISDA recently published a series of credit derivative templates, including a document on a recovery lock credit default swap permitting market participants to take a view on where debt of a defaulting Reference Entity will trade. ISDA also published two documents in the CDS on ABS series. These two templates are revised versions of the CDS on ABS Cash or Physical template that was published in June 2005, with an added variant to permit an alternative total return swap valuation mechanic. In addition, ISDA published a CDS on CDO template to facilitate trading in cash flow CDOs.

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