ISDA publishes statement on credit derivatives definitions
13 April 2018 London
Image: Shutterstock
The International Swaps and Derivatives Association (ISDA) is set to advise with its board on whether further amendments to the association’s credit derivatives definitions should be considered.
ISDA published the statement from its board of directors on reported instances of narrowly tailored credit events.
The association has also proposed a process to consider improvements to the efficiency of the credit derivatives market.
In the statement, ISDA said: “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 minimising the impact on the corporation, in order to increase payment to the buyers of CDS protection.”
The ISDA board commented that the Dodd-Frank Act in the US and other similar legislations created a new regulatory framework for the credit derivatives market.
It also noted that swap market participants remain subject to relevant anti-manipulation and anti-fraud laws.
ISDA added: “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 analysed against the criteria for credit events within the ISDA credit derivatives definitions to determine whether a credit event has occurred.
ISDA stated: “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.”
ISDA published the statement from its board of directors on reported instances of narrowly tailored credit events.
The association has also proposed a process to consider improvements to the efficiency of the credit derivatives market.
In the statement, ISDA said: “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 minimising the impact on the corporation, in order to increase payment to the buyers of CDS protection.”
The ISDA board commented that the Dodd-Frank Act in the US and other similar legislations created a new regulatory framework for the credit derivatives market.
It also noted that swap market participants remain subject to relevant anti-manipulation and anti-fraud laws.
ISDA added: “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 analysed against the criteria for credit events within the ISDA credit derivatives definitions to determine whether a credit event has occurred.
ISDA stated: “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.”
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