SNS Reaal Default Swaps Triggered by Restructuring Credit Event

The nationalization of SNS Reaal NV constitutes a restructuring credit event that will trigger payouts on derivatives insuring the debt, according to the International Swaps & Derivatives Association.

ISDA’s determinations committee, a group of 15 dealers and money managers that govern the market, will meet tomorrow to decide whether to hold one or more auctions to settle the contracts, the industry group said on its website. Settlement may be distorted because the securities that could be delivered in exchange for compensation were expropriated by the Dutch government.

“The issue of deliverables has arisen on multiple occasions and been averted every time by good luck or good judgment,” said Matt King, global head of credit strategy at Citigroup Inc. in London. “It’s unclear if that will happen this time.”

SNS was nationalized after real estate losses brought the fourth-largest Dutch bank to the brink of collapse. Expropriation isn’t explicitly covered by ISDA’s defined categories of credit events, which include bankruptcy, failure to pay and restructuring, and the committee twice deferred a ruling.

Though contracts on SNS aren’t actively traded, the impact of the expropriation is proving a test for the market. ISDA is working on changes to standard swaps contracts to address issues highlighted by credit events since the definitions were written.

Contracts on SNS aren’t among the 1,000 most-traded entities tracked by the Depository Trust & Clearing Corp., which runs a central registry for the market. 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.