ISDA to meet Friday to discuss if Greek swap is a credit event

The International Swaps and Derivatives Association, the arbiter of rules governing the sale and use of credit default swaps, said on Tuesday it will discuss whether Greece’s debt swap should be considered a «credit event.”

ISDA said its European Determinations Committee will hold a conference call at 11 a.m. GMT (6 a.m. EST) on Thursday, March 1 «to determine whether a credit event has occurred.”

One of the major concerns about Greece’s debt restructuring was whether the hard-fought agreement with private debt holders would give Greek sovereign credit default swap investors a justification for demanding payment on the protection they bought.

If the committee determines a credit event has occurred, it could lead to a payout on outstanding Greek CDS contracts following an auction process that can take a week or more to complete. Credit default swaps provide protection for an investor who holds an underlying security that suffers from a default or restructuring.

According to data from the Depository Trust and Clearing Corporation, a U.S. clearing house that tracks CDS contracts and other instruments, the maximum amount of money to be paid out on Greek CDS contracts is approximately $3.2 billion. This is referred to as the notional value.

However, the likely amount paid out will be 73 to 74 percent of that, corresponding to the real loss on the face value of the bonds that came from the debt swap agreement settled last week. If that is the case, the actual payout would be in the area of $2.36 billion.

DTCC’s data, as of February 17, indicates there are 4,263 actively traded contracts on Greek sovereign debt, which add up to a gross value of $69.9 billion. When the contracts are offset against each other, the notional value is reduced to the $3.2 billion.

ISDA said on Monday one of its members asked the governing body if last week’s approval by Greece’s Parliament to implement collective action clauses, or CACs, on debt governed by Greek law constitutes a so-called «restructuring credit event.”

ISDA’s European Determinations Committee had said it would announce by 5 p.m. GMT (12 p.m. EST) on Wednesday whether to entertain the question.

At issue is the retroactive inclusion of CACs in sovereign debt governed by Greek law. CACs force all bondholders to proceed with a swap once it has won a specified level of approval.

The ISDA member contends that not all bondholders are being treated equally.

The question asks whether the Greek debt restructuring is a «credit event» because it subordinates eligible bondholders to the European Central Bank and other national central banks, which hold sovereign debt governed by Greek law.

Private investors holding about 200 billion euros of Greek bonds will take a loss of 53.5 percent in the face value of their holdings and a real loss of 73-74 percent.

According to the new law, the swap will go ahead once 50 percent of bondholders have responded to the offer, and the CACs will be activated once a two-thirds majority of that quorum has voted in favor of the swap.

A credit event occurs, or is triggered, when there is either a failure to pay, a repudiation/moratorium, or restructuring of the underlying debt.

Also at issue is whether the announcement results directly or indirectly from a deterioration in the credit-worthiness or financial condition of Greece.

ISDA’s regional Determinations Committees discuss issues involving credit events, CDS auctions, succession events and other issues, with decisions governed by a set of internal rules.


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