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ISDA Plans Biggest Overhaul to Credit Derivatives Since 2003

ISDA Planning Biggest Overhaul to Credit Derivatives Since 2003
Greece's debt restructuring last year raised concern about potential flaws in the insurance contracts. Photographer: Kostas Tsironis/Bloomberg

The International Swaps & Derivatives Association is planning the biggest overhaul of the $24 trillion credit derivatives market since 2003.

New York-based ISDA is seeking feedback from market participants on a set of possible changes to the standards governing credit-default swaps, including plans to ease settlement of contracts triggered by a sovereign debt exchange, according to Mark New, the organization’s assistant general counsel in the Americas.

Greece’s debt restructuring last year raised concern about potential flaws in the insurance contracts. No time frame has been set for changes to the market created by banks including JPMorgan Chase & Co., which will follow a 2009 revision of rules that included new standards boosting transparency and confidence, New said.

“This review is about looking back at the experience of the past 10 years since the 2003 definitions were published and thinking about what have we learned in that time and what changes might need to be made,” New said in a phone interview. “The working group is very much ongoing and considering a lot of different proposals.”

There are a total 2.14 million contracts covering a gross $24 trillion worth of credit products, according to the Depository Trust & Clearing Corp., which runs a central registry for the derivatives market.

One of the suggestions being considered would allow sovereign default swaps to be settled with packages of other assets in a government bond exchange. That would prevent distortions in payouts, a concern after Greece undertook the biggest sovereign-debt restructuring in history.

Greek Bondholders

Greek bondholders were forced to write off more than 100 billion euros ($130 billion) of debt in return for new bonds worth 31.5 percent of their original investment. The smooth settlement of default-swaps was “a lucky break,” Michael Hampden-Turner, a strategist at Citigroup Inc. in London, said at the time.

ISDA is also seeking to ease the transfer of swaps contracts when companies merge. 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.

The proposals don’t address expropriation of debt by a government, the most recent test for the market. Investors are concerned that settlement of swaps on SNS Reaal NV will be distorted because the securities that could be delivered in exchange for compensation were seized by the Dutch state. ISDA yesterday said it will publish an initial list of deliverable obligations after determining the nationalization constituted a restructuring credit event.

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