Isda publishes new credit derivatives definitions

Major changes in Isda’s latest definitions, compared with its 1999 set, include: a new test for identifying the successor to a reference entity, and amendments to credit events such as bankruptcy, repudiation, moratorium and restructuring. Alternative procedures for non-deliverable bonds and loans are included, and the act of novation – assignment of trades from one party to another – is also addressed.

One of the most significant changes is the inclusion of a new numerical threshold test for identifying the successor to a reference entity. “It became clear that the old definitions were ambiguous after [UK energy company] National Power de-merged [in 2000],” Kimberley Summe, general counsel with Isda in New York, told RiskNews.

In terms of restructuring – a perennial bone of contention between dealers and end-users - the latest definitions formally set out four styles: no restructuring, full restructuring with no modification, modified restructuring and modified-modified restructuring. The latter style – often referred to as mod-mod R – is prevalent in Europe and encompasses a twofold approach, Isda’s Pickel told RiskNews. Restructured bonds and loans can be delivered up to 60 months past the restructuring date, while the limit remains 30 months for all other deliverable obligations .

With a small number of banks – including Italy’s IntesaBci, for example - pulling back from the credit derivatives market in the past two years, dealers made it clear to Isda that they wanted the novation of trades addressed in the definitions. “The incorporation of a straightforward novation agreement should smooth the process and facilitate banks’ tracking of exposures,” Summe said.

Isda members have agreed the new definitions will become effective from late March – allowing documentation, back-office staff and traders around six weeks to make the required adjustments in their procedures.