For Immediate Release Wednesday, January 11, 2006
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ISDA Issues Convertible Asset Swap
Templates
Under the terms of a convertible asset swap, a party buying a convertible bond sells a call option on that bond to the bond seller, and enters into a swap under which the option buyer receives the bond coupon and pays a LIBOR-referenced floating rate. The CAST template may be used to document this transaction. The swap ends when the call is exercised or expires. Generally the option buyer will then hedge itself by selling a call option on the same bond to a third party. The CAOT template may be used to document this hedge.
The convertible asset swap market, a mature market in Europe and North America, has seen significant growth in Asia, where issuance of underlying convertible and exchangeable bonds has been developing in new markets, such as India. Rising Asian stock markets have also increased the likelihood of conversion or exchange for these bonds. Most trades are currently negotiated bilaterally between banks and their clients, but standardized documentation should further encourage the development of an inter-dealer market, and tighter pricing for derivatives end-users.
“This is another example of ISDA helping trading activity to develop further,” said Robert Pickel, Chief Executive Officer and Executive Director, ISDA. “Standardizing documentation both encourages liquidity and assures legal certainty for the parties involved.”
About ISDA
ISDA is the global trade association representing leading participants in
the privately negotiated derivatives industry. ISDA was chartered in 1985,
and today has more than 670 member institutions from 47 countries on six continents.
These members include most of the world's major institutions that deal in
privately negotiated derivatives, as well as many of the businesses, governmental
entities and other end users that rely on over-the-counter derivatives to
manage efficiently the financial market risks inherent in their core economic
activities. Information about ISDA and its activities is available on the
Association's web site: www.isda.org.
®ISDA is a registered trademark of the International
Swaps & Derivatives Association, Inc.