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Greek Default Swaps Trading Rises as ISDA Mulls Trigger Event

The amount of Greek debt protected by credit-default swaps has risen to a two-month high of $3.25 billion as traders consider whether contracts have been triggered by an exchange of European Central Bank holdings.

The number of Greek swaps outstanding rose for a fifth week to 4,290 contracts, according to the Depository Trust & Clearing Corp. It costs $7.3 million upfront and $100,000 annually to insure $10 million of Greek debt for five years, signaling a 94 percent probability of default within that time.

Dealers and investors meet tomorrow to rule if Greece caused a credit event when it exchanged about 50 billion euros ($67.27 billion) of the ECB’s bonds for new securities that will be exempt from losses, the International Swaps & Derivatives Association said. The proposed use of collective action clauses to enforce so-called haircuts on private investors that don’t agree to write down their debt holdings will trigger swaps, according to ISDA’s rules.

“It has a shot of winning, but I suspect it won’t be called a credit event at this stage,” said Peter Tchir, founder of New York-based hedge fund TF Market Advisors. “It will likely have to wait until someone actually gets CAC’d.”

Greek swaps outstanding fell to $3.21 billion last month from $5.6 billion a year ago, according to data from DTCC, which runs a central registry for the market. The number of contracts is little changed compared with a year ago.


Although the ECB’s exchange is unlikely to meet the definition of subordination needed to trigger a credit event, the request signals that investors will contest the nation’s debt restructuring, according to Michael Hampden-Turner, a strategist at Citigroup Inc. in London.

The bond switch makes the ECB effectively, though not legally, senior to other bondholders, according to JPMorgan Chase & Co. There must be a legal change in the ranking or priority of bondholders for credit-default swaps to be triggered, according to ISDA rules. The group’s determinations committee decides whether contracts can be paid out.

A request on Irish swaps was rejected last year when the committee ruled the International Monetary Fund’s preferential creditor status in that nation’s rescue didn’t constitute subordination.

“It highlights that there may well be court cases with investors willing to challenge actions which are out of the ordinary,” Hampden-Turner said. “CDS will likely get triggered soon enough anyway.”

SovX Index

The Markit iTraxx SovX Western Europe Index of credit-default swaps on 15 governments dropped 2.5 basis points to 339.5, according to BNP Paribas SA. A decline signals improvement in perceptions of credit quality.

The cost of insuring corporate and financial debt also fell. The Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings decreased 7.5 basis points to 556.5. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings fell 0.75 basis point to 127.25 basis points.

The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers decreased 5.5 basis points to 197.5 and the subordinated index dropped six to 343.

A basis point on a credit-default swap protecting 10 million euros of debt from default for five years is equivalent to 1,000 euros a year. Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

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