ISDA considering new CDS rules for bail-ins

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ISDA is consulting on a proposal to add another credit event for financial credit default swaps in order to adapt to sweeping changes in regulation that will give supervisory authorities the power to bail-in the debt of floundering institutions.

The proposal forms part of a wider overhaul of the CDS definitions, which are being revisited for the first time in a decade to fix a number of flaws in the instruments, including the way they react to sovereign debt restructurings such as that of Greece (see article).

Along with sovereign CDS, amending financial CDS to account for the new bail-in regime is seen as a top priority in overhauling the contract to ensure it remains a viable hedging product.

“The background regime for credit instruments is changing at the moment with the introduction of recovery and resolution regimes enabling regulatory authorities to write down bank debt to avoid bankruptcies,” Mark New, assistant general counsel at the International Swaps and Derivatives Association in Washington, told IFR.

“This proposal introduces a new credit event for financials to address this new regime, by CDS triggering on a bail-in type event.”

Global authorities want to be able to write down bank debt of ailing financial institutions to ensure bondholders shoulder bank losses rather than taxpayers. European policymakers originally signalled senior debt would be subject to a bail-in from 2018 onwards, but bankers now speculate this could be brought forward to 2015.

Supervisors wrestling with Europe’s under-capitalised banking sector have already provided previews of how this new regime may play out in practice. The Irish bank restructurings in 2011 saw subordinated debt written down by 80%, while the Dutch government nationalised mid-tier lender SNS Reaal earlier this year, completely wiping out sub bondholders in the process. Cyprus’ bungled EU bailout went a step further by insisting on writing down senior debt and haircutting uninsured depositors.

Other bank restructurings may well be waiting in the wings, but there are concerns the CDS definitions may not capture future reorganisations. While SNS Reaal triggered CDS, some lawyers at the time said that under a strict reading of the credit definitions, a nationalisation should not qualify as a credit event.

“The problem is that while write-downs may be caught as restructuring credit events under the current definitions, it’s not always clear, and you may get a trigger event in some circumstances and not others. By including a new, separate credit event you will get a better clarity of outcome,” said New.


The proposals were drafted by ISDA’s Credit Steering Committee and will now be put out to its members for consultation. The trade association has previously indicated it is aiming to roll out the new credit definitions by the end of the year, while some participants have expressed concern over imposing the reforms on legacy trades (see article).

I don't believe that whatever rule they adopt is ever going to unleash the CDS bomb.
Looks like the ISDA is busy again. If I'm understanding this correctly, why would anyone (any financial institution / hedge fund) invest in CDS again?

The world's biggest banks have agreed to tear up the rulebook on derivatives to make it easier to resolve a future failing institution like Lehman Brothers.

People familiar with the matter said 18 bank "dealers," ranging from Credit Suisse to Goldman Sachs, have agreed to give up the right to pull the plug on derivatives contracts with a crisis-stricken institution.

Several months of complex talks involved regulators and asset managers but were led by dealers under the umbrella of the International Swaps and Derivatives Association.

US regulators, who have previously condemned the industry's crisis planning as inadequate, had demanded banks come up with a plan to stop their counterparties terminating derivatives contracts in the event of a crisis. The banks portrayed the success of the talks as a rare positive example of industry collaboration.

ISDA is due to announce the agreement to change its "protocols," which govern the $700 trillion market, in the next few days. They will take effect from January 1, 2015.
Looks like they are at least trying to avoid credit events that would trigger a tsunami of counter / cross claims that everyone knows will not nett out to anything near zero.

CDS's are the financial WDM's that can never be allowed to trigger
No Rblong, they are changing the rules to make it nearly impossible to claim on a CDS, because they know damn well what is flying toward them at the speed of light. The next financial crisis will indeed be the last one. while China may have very significant gold holdings, over 12,000 tons by Harvey Organ's estimate, their foreign reserves are denominated in fiat, and will therefore be quite worthless.
China is also buying up Africa with our fiats. It is smart of them to try exchange the digipaper for something real while they still can.
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