The new protocol hardwires the settlement of contracts with cash payments via auctions; previously, individual protocols were required to cash-settle credit derivatives trades because the auction procedure was not embedded into the standard CDS contract.
The hardwiring procedure will also lead to the creation of a Determinations Committee consisting of dealer and buy-side representatives who can make binding decisions on matters, including whether a credit event has occurred, whether obligations are deliverable and whether an auction should be conducted.
Other changes included the removal of modified restructuring as a credit event in North American transactions.
The implementation of this has caused concern among credit portfolio managers because of constraints on regulatory capital relief prescribed by Basel II. The new standard requires hedgers to use unconventional and less liquid contracts, or hedge with the standard contract and forgo as much as 40% of current regulatory capital relief prescribed by Basel II in doing so.
Other modifications to the North American contract include the use of fixed coupons of either 100 or 500 basis points.
"Hardwiring is central to the many improvements Isda and the industry are making to the CDS contract to further ensure infrastructure and standards for transacting these important risk management instruments are straightforward, secure and widely implemented," Bob Pickel, Isda's executive director and chief executive, noted in a statement.