Restructuring debate will rage on after CP3, says Munro
The Basel Committee’s widely anticipated ditching of restructuring as a required credit event for capital relief in its forthcoming third consultation paper on Basel II, will not bring to an end the heated debate between hedging banks and investors over the issue of restructuring, according to Cameron Munro, global head of credit derivatives at National Australia Bank.
“It has been very easy for the commercial banks to hide behind the Basel II requirements to date that restructuring is a required credit event for offset,” said Munro. “My view is even if Basel II removes restructuring as a definite requirement for offset, that is not going to stop the debate that the commercial banks will want to have as to whether restructuring is a necessary credit event.”
The inclusion of restructuring as a credit event has been a highly controversial issue, with some investors claiming that lending desks of commercial banks could force a restructuring of a company on the basis that the bank’s trading desk – the protection buyers – could realise a profit on the credit derivatives contracts. Some commercial banks have in turn argued that restructuring has only been included within credit derivatives documentation to comply with regulatory capital requirements.
However, if the Basel Committee drops restructuring as a requirement for regulatory capital relief in its May consultation paper, this will merely push the debate in a new direction, said Munro.
“I actually think any change to remove restructuring in Basel II will be a positive development, because that would lead the debate to where it should be, which is with the market - the commercial banks and the end investors,” he said. “If restructuring is removed, it would potentially create large basis risk for the commercial banks.”
Meanwhile, Isda plans to examine the restructuring trigger in its credit derivatives documentation within the next few months, said Louise Marshall, New York-based policy director at the association.
“So far, we have concentrated on the deliverability of obligations in a credit event, but going forward we have undertaken at the behest of our investor members to examine whether a revision of the restructuring trigger itself is necessary,” she said.
Isda published its new credit derivatives definitions in February, which set out four restructuring options: no restructuring; full restructuring with no modification; modified restructuring; and modified-modified restructuring, a new provision aimed at addressing criticisms raised in the European market. The new definitions will come into effect from May 6, following a two-month delay caused by a longer than expected implementation of bank back-office systems, said Isda.
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (point 2.4), printing is limited to a single copy.
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (clause 2.4), an Authorised User may only make one copy of the materials for their own personal use. You must also comply with the restrictions in clause 2.5.
If you would like to purchase additional rights please email info@risk.net
More on Markets
Barclays disputes CDS committee decision ahead of auction
Representing the bank, law firm Milbank argues the committee’s approach risks constraining the market and goes against expectations
How Risk.net’s robots unlocked Ucits trade data
Machine learning tool helps reveal the largest European derivatives users – and who they trade with
Pricing and funding woes hit gilt repo
QT-driven funding cost rises combined with clients’ price demands see at least two banks pull back
China set to extend NDF trading scheme for onshore banks
CFETS expected to introduce RFQ functionality and more currencies for non-deliverable forwards
New data reveals Pimco is top Ucits interest rate swaps user
Counterparty Radar: US managers and dealers reign supreme in European retail fund space
Goldman appoints new financial risk head
Promotion sees Josh Schiffrin oversee strategy and financial risk, including trading supervision
Another post-Libor rate aims to clear Iosco bar
After two rivals were slapped down by the benchmark overseer last year, will Axi fare differently?
Crypto options need more principal market-makers – GS trader
Absence of risk warehousing market-makers holding back options development, says GS crypto trader