ISDA Delays Overhaul of $18 Trillion Derivatives: Credit Markets

The International Swaps & Derivatives Association said it postponed the biggest overhaul to the $18 trillion credit derivatives market in more than a decade to give investors more time to prepare for the changes.

New rules governing credit-default swaps will take effect Oct. 6 rather than Sept. 22, ISDA said in a statement yesterday. The changes seek to fix flaws in sovereign and bank insurance that prevented some contracts from paying out as intended since the financial crisis.

As part of the overhaul, the list of events triggering swaps is being expanded to include bail-ins, where investors are forced by regulators or governments to contribute to bank rescues. The new definitions also explicitly insure against debt writedowns, bond exchanges or conversions of debt into equity.

The delay will “enable market participants and infrastructure providers to make the necessary operational and infrastructure changes and to allow a smooth adoption of the new definitions with minimal impact on markets,” ISDA said in the statement.

The decision follows the industry group’s extension of the period to convert some outstanding trades and Markit Group Ltd.’s plan to postpone changes to its benchmark indexes to Oct. 6. The new rules were originally planned to take effect in March.

‘Reduces Risk’

Aligning trading of credit-default swaps and derivatives indexes using the new terms “reduces risk by minimizing difference between new trades and legacy transactions,” ISDA said.

More than 1,400 investors agreed to automatically convert trades on most companies to the new terms, according to a list of firms on ISDA’s website.

Swaps tied to banks, governments and some companies won’t be automatically converted and investors can choose to exit those trades and buy new ones with the improved terms. Investors may start trading some new contracts from Sept. 22, according to ISDA.

“It’s a grey cloud that it’s been postponed, but the silver lining is there,” said Soren Willemann, head of European credit strategy at Barclays Plc’s investment-banking unit in London, which plans to start trading financial and sovereign contracts under the new rules Sept. 22. “There are now two weeks where single-name CDS can trade around and settle down, and indices will price off that, which is good for indices.”

Credit-default 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. They’re used to hedge against losses or speculate on creditworthiness.

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