Swaps arbiter to discuss merit of Greek CDS question






The International Swaps and Derivatives Association, the arbiter of rules governing the sale and use of credit default swaps, said on Monday it will decide this week whether to discuss if Greece’s debt swap should constitute a “credit event” and trigger a payout.

One of the major concerns about Greece’s debt restructuring was whether the hard-fought agreement with private debt holders would give Greek sovereign credit default swap investors a justification for demanding payment on the protection they bought.

The issue arises because an ISDA member asked the governing body if last week’s approval by Greece’s Parliament to implement collective actions clauses (CAC) on debt governed by Greek law constitutes a so-called “restructuring credit event.”

At issue is the retroactive inclusion of CACs into sovereign debt governed by Greek law. CACs force all bondholders to proceed with a swap once it has won a specified level of approval.

The ISDA member contends that not all bondholders are being treated equally.

The question asks whether the Greek debt restructuring is a “credit event” because it subordinates eligible bondholders to the European Central Bank and other national central banks, which hold sovereign debt governed by Greek law.

ISDA said in a statement it will make a decision on whether to review the issue by 5 p.m. GMT on Wednesday.

Private investors holding about 200 billion euros of Greek bonds will take a loss of 53.5 percent in the face value of their holdings and a real loss of 73-74 percent.

Credit default swaps provide protection for an investor who holds an underlying security that suffers from a default or restructuring.

According to the new law, the swap will go ahead once 50 percent of bondholders have responded to the offer, and the CACs will be activated once a two-thirds majority of that quorum has voted in favor of the swap.

A credit event occurs, or is triggered, when there is either a failure to pay, a repudiation/moratorium, or restructuring of the underlying debt.

Also at issue is if the announcement results directly or indirectly from a deterioration in the creditworthiness or financial condition of Greece.

ISDA’s regional Determinations Committees discuss issues involving credit events, CDS auctions, succession events and other issues, with decisions governed by a set of internal rules.