The International Swaps and Derivatives Association, Inc. (ISDA) today published a statement from its Board of Directors on reported instances of narrowly tailored credit events and a process to consider improvements to the efficiency of the credit derivatives market.
“The ISDA Board of Directors has noted recent press reports of instances of credit default swap (CDS) market participants entering into arrangements with corporations that are narrowly tailored to trigger a credit event for CDS contracts while minimizing the impact on the corporation, in order to increase payment to the buyers of CDS protection.
“The ISDA Board notes that the Dodd-Frank Act in the US and other similar legislation elsewhere created a new regulatory framework for the credit derivatives market. In addition, swap market participants remain subject to relevant anti-manipulation and anti-fraud laws.
“Whether any specific narrowly tailored arrangements meet the definition of a credit event under the ISDA Credit Derivatives Definitions will be determined by one of five regional Credit Derivatives Determinations Committees (DCs), each of which comprises 10 sell-side and five buy-side market participants. Under the DC rules, a determination can only be made based on publicly available information submitted to the DC. This information is then analyzed against the criteria for credit events within the ISDA Credit Derivatives Definitions to determine whether a credit event has occurred. The credit event determination process does not allow the DC to make subjective decisions, or to consider the intent or good faith of the parties that put in place the arrangements leading to a potential credit event. This ensures the process is objective and predictable, and decisions can be made quickly.
“We believe that narrowly tailored defaults, those that are designed to result in CDS payments that do not reflect the creditworthiness of the underlying corporate borrower (the reference entity in the CDS), could negatively impact the efficiency, reliability and fairness of the overall CDS market. We have therefore instructed the ISDA staff, as part of its ongoing dialogue with the market, to consult with market participants and advise the Board on whether further amendments to the ISDA Credit Derivatives Definitions should be considered.”
For Press Queries, Please Contact:
Nick Sawyer, ISDA London, +44 203 808 9740, nsawyer@isda.org
Michael Milner-Watt, ISDA London, +44 203 808 9727, mmilner-watt@isda.org
Lauren Dobbs, ISDA New York, +1 212 901 6019, ldobbs@isda.org
Amanda Leung, ISDA Hong Kong, +852 2200 5911, aleung@isda.org
Documents (1) for ISDA Board Statement on Narrowly Tailored Credit Events
Latest
The ISDA Notices Hub: One Year On
In times of war, armed forces are often required to mobilize over large distances at short notice. The most dreaded response to the question of how they are to be transported is ‘by LPC’, meaning ‘leather personnel carrier’ – the...
ISDA Response to OSC Call for Feedback
On June 26, ISDA responded to the Ontario Securities Commission’s (OSC) consultation on facilitating access to its regulatory framework and reducing the burden for capital markets participants by publishing a machine-readable dataset of regulatory instruments. ISDA's comments are supportive of...
ISDA Comments on EP's MISP Draft Reports
On July 15, ISDA shared comments with policymakers in the European Union on the European Parliament’s (EP) draft reports by Member of the European Parliament (MEP) Markus Ferber and MEP Eero Heinäluoma on the Market Integration and Supervision Package (MISP)....
Building Markets, Creating Opportunity
Deep and liquid derivatives markets are fundamental to the development of well-functioning financial markets and healthy economies. They support lending, investment and financial stability, creating the certainty needed for economic growth. But strong derivatives markets do not emerge by chance....