Cash-settlement auctions working, says Isda
The auction process for cash-settling credit derivatives trades has been tested recently but is working well, said Bob Pickel, chief executive of the International Swaps and Derivatives Association, at a symposium held by the organisation in New York on January 22.
“Following the Lehman Brothers situation and the conservatorship of [government-sponsored mortgage lenders] Fannie Mae and Freddie Mac, we have been running auctions virtually weekly. The story you can tell across all of it is that the process has operated smoothly,” he said.He noted that the past seven months had seen large firms and a major dealer collapse, European and sovereign credit entities defaulting, as well as multiple simultaneous credit events occurring on widely-traded entities.
Pickel also referred to various issues that had come up in the course of the recent auctions. These included a controversial decision over whether some principal-only bonds could qualify as deliverable obligations for the Fannie and Freddie auction, as well as the effect of technical market factors on the auction’s outcome.
In the event, a lack of market participants willing to physically deliver subordinated paper led to the unusual outcome of recovery rates for subordinated bonds ending up higher than those for senior debt.
More recently, Pickel said, there had been questions over whether or not the financial situation of New York-based clothing firm Liz Claiborne constituted a credit event or not. On January 13, the company completed an amendment and extension of its revolving credit facility, apparently prompting queries from some Isda members.
“In all these situations there’s been a real commitment among market participants to deal with these issues, to deal with them expeditiously and come up with a result that works to facilitate these auctions going forward,” said Pickel.
Later, Dan Cunningham, a partner at law firm Allen & Overy in New York, made a spirited defence of the master agreement architecture around CDSs. “This ship has been through some incredible storms, but it’s not the Titanic,” he said.
Complaints that the outcome of cash-settlement auctions such as those for Fannie Mae and Freddie Mac had changed the nature of CDSs as an instrument were untrue, he said.
Isda is pressing ahead with a plan aimed at hardwiring the cash settlement auction process into CDS documentation. The group intends to release a draft ‘big bang’ protocol by early February, which will update outstanding contracts on a multilateral basis.
Under pressure from regulators, the organisation originally pledged to complete hardwiring by the end of last year, although the Lehman bankruptcy and ensuing market turmoil has seen it delayed. The association now hopes to launch the final protocol by early March.
At the moment, individual protocols are required to cater for credit events among CDS reference entities.
Numerous other auctions are planned over the next month. On January 30, auctions will be held to cash-settle credit derivatives trades linked to Equistar Chemicals, Lyondell Chemicals and Millennium America, three US-based subsidiaries of the Dutch chemical firm LyondellBasell which filed for bankruptcy on January 6.
The first cash-settlement auctions to be held for European LCDSs are scheduled for February 5 and 9 respectively, after Helsinki-based bathroom company Sanitec and chemical firm British Vita failed to make repayments on various loans. The auctions will also be the first to be held on reference obligations included in the Markit iTraxx LevX indexes of European LCDSs.
Additionally, auctions to cash-settle CDSs referencing Toronto-based communications equipment firm Nortel Networks are expected on February 10, after the firm sought creditor protection in Canada on January 14.
See also: Clearing single-name CDSs may prove uneconomical
Ecuador recovery set at 31.375% in first sovereign CDS auction
Auction sets 1.5% recovery on Tribune CDS
Isda documentation to cover CDS settlement auctions
Fannie and Freddie auctions raise questions about CDSs
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.
You may share this content using our article tools. Printing this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
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. Copying this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email info@risk.net
More on Regulation
EU banks fear green asset ratios paint an unfair picture
Industry lobbyist clashes with lawmaker over usefulness of new sustainability disclosure
EU watchdogs to launch prop trader capital review in April
Prop traders say bank-style IFR rules are driving them out, but doubt EBA will suggest changes
Investors say new SEC disclosures may sit on shelf
Advisory committee questions value of rule 605 changes, even for retail investors
CFTC hears ‘call to action’ from swaps end-users on Basel III
Commissioner Pham mulls engaging with prudential regulators over capital hit on clearing
Iosco gears up for ‘intensive work’ on AI regulation
Watchdogs risk ‘falling behind the curve’, secretary-general warns; FSB also working on guidance
Deposit insurance could transform outlook for China TLAC
Issuance needs drop dramatically if regulators allow maximum inclusion of deposit insurance fund
Canada’s FRTB pioneers get snowed on fund-linked trades
As Basel capital reforms go live, risk managers eye early adopters’ progress and push to improve capital treatment of fund-linked products
Emir 3.0 threatens lag for Simm revisions
New EU rules could stall changes aimed at improving risk sensitivity of industry margin models
Most read
- Quants are using language models to map what causes what
- Reluctantly, CME moves to clear US Treasuries
- The bank quant who wants to stop gen AI hallucinating