What’s the CDDC, Whose Rulings Can Unlock Billions?

If you’ve lent someone money and they can’t pay you back, the chances are you’ll be OK if you bought insurance against the loss. Late in the last century, such provisions evolved to become tradable securities used not only as a form of protection, but also as a wager on the creditworthiness of banks, corporations and even nations. Fortunes can be earned from these credit default swaps when a borrower runs into trouble and the lender’s insurance policy is triggered. Whether and when the trigger is pulled is a decision for an industry body known as the Credit Derivatives Determinations Committee. Few people even in the debt markets are entirely familiar with the panel’s internal workings, and its deliberations rarely make front-page news. So when the CDDC was asked to decide the fate of billions of dollars of securities tied to bailed-out bank Credit Suisse Group AG, it wasn’t easy to predict the outcome.

Before the global financial crisis, it was the seller or the buyer of a CDS who decided whether a borrower had failed to make good on their obligations and it was time to pay out. This became problematic as the CDS market grew and regulators began to worry that in a future credit crunch, buyers and sellers would trigger payouts just to cover their losses. When companies started to collapse en masse from 2007, the industry came up with the idea of a panel of experts, whose decisions on which swaps would pay out and under what conditions must be followed by the entire market. The CDDC today comprises five regional panels, each consisting of lawyers from around a dozen institutions that are active buyers and sellers of CDS.