S&P slams Isda’s proposed changes to default swaps definition

If approved, the amended language would allow for the triggering of credit default swaps contracts where public information that “reasonably supports” the occurrence of a credit event is available. Current language is more precisely worded – requiring publicly available information that “confirms” the occurrence of a credit event.

“If Isda’s proposed language change is implemented and included in new collateralised debt obligation [CDO] deals that S&P rates, we would ask that it be struck-out and the old language included instead,” Terrence McCarthy, a New York-based analyst in the structured finance group at Standard & Poor’s, told RiskNews.

The rating agency uses historical data to determine the credit risk of CDOs. McCarthy told RiskNews that the increased likelihood of credit events that may accompany any language change would not be captured in its default study, which is culled from confirmed publicly available information. To implicitly account for the proposed softer language, Standard & Poor’s would need to revisit its default probability assumptions, McCarthy added.

Moving from more precise to more vague language may ultimately lessen default swap liquidity, as it could lead to an increased number of disputes, Standard & Poor’s also claimed.

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 copy this content. Please contact info@risk.net to find out more.

You need to sign in to use this feature. If you don’t have a Risk.net account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here