ISDA comments on the lessons learned from insuring Greek debt

One week on from the credit event that triggered payment of insurance on Greek sovereign debt, the International Swaps and Derivatives Association has reflected on what happened.

A week has passed since the auction for Greek CDS. Perhaps it’s now time to reflect on the credit event process. Toward that end we wanted to share our thoughts in a combined derivatiViews and media.comment post, and we also encourage our readers to offer their views.

In our minds, the most striking thing about the entire situation was the wholesale shift in sentiment regarding the potential risks of a credit event. In the space of a few months, it went from being a big issue to a non-issue (though it really should not have been an issue at all). We – and anyone who looked at the DTCC’s trade repository website – knew all along that the level of Greek CDS exposure was relatively small. In addition, while it was published in aggregate on the DTCC’s site, it was known on an individual firm level to regulators. The credit event truly was a non-event.

One of the major reasons why it was a non-event is because of the significant amount of work that ISDA and the Determinations Committees have put into ensuring that the credit event process is fair and robust. This process has been tested many times since it was introduced a few years ago and continues to work well for all market participants.

Our biggest disappointment throughout the process was the lack of understanding by some of two important points about the credit event process. The first point relates to the structure, composition and workings of the Determinations Committees. Apparently, the fact that the names of the individual firm representatives serving on the DCs are not disclosed makes them “secretive” to some. This is despite the fact that the names of the firms serving on the DCs are public, their votes are public, and the rules governing how the DCs function are public. It’s important to note that the individual firm representatives can and do change from credit event to credit event; there is no “list” per se.

The second point relates to the nature and definition of a credit event. As we said repeatedly, particularly here, a contract is a contract. One can speculate about what might be or what should be – and many did. But we repeatedly urged people to read and understand the contract as written. If they had, then there would have been little surprise that the DC could really not act until the collective action clauses (CACs) were invoked by the Greek government. This important step meant that the Greek restructuring was binding on ALL holders, which is a condition required for a credit event to occur under the restructuring clause. In addition, until the Greek government acted – and posted their action in the official government gazette – the CACs were not officially invoked. This too is required before a credit event can be declared. That’s because the DCs do not vote prospectively on credit events.

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