International Swaps and Derivatives Association Inc. (ISDA) is updating derivatives credit definition to include the new government bail-in Credit Event trigger for CDS contacts on financial reference entities in non U.S. jurisdiction. ISDA also modify the typical terms of sovereign CDS contracts in wake of recent Greek debt crisis by allowing a buyer of protection to deliver upon settlement the assets into which the Reference Obligation has converted even if such assets are not otherwise deliverable. Further they have more changes and creating a concept called SRO , Standard Reference Obligation.It is proposed that ISDA will publish a list, known as the “SRO List”, of Reference Entities that are frequently traded on the CDS market, and the SRO List will specify a Standard Reference Obligation (and seniority tier) for each of these Reference Entities.This should increase the fungibility of CDS transactions with the same Reference Entity. More details on these changes are here.
New credit definitions will supersede the ISDA 2003 credit definitions. In 2003 credit definition ISDA had defined six credit events. Historically out of these six, restructuring credit event has been toughest contingency to contract for in a CDS. Contractual conditions affects the pricing of CDS. So there can be spread in 2014 ISDA CDS trade and already traded same CDS on 2003 ISDA definitions.
It is anticipated that market participants will begin to use the 2014 Definitions with the September 2014 credit default index swap roll date (i.e., September 22, 2014). The 2014 Definitions will apply to new trades only if so elected by the parties (e.g., by incorporating their terms into a trade confirm). Additionally, ISDA has released a draft protocol that parties can use to elect to have the 2014 Definitions apply to existing trades, although certain existing transactions such as sovereign CDS and CDS on European financial entities are expected to be excluded from the protocol given the substantial impact the changes could have on such trades’ terms and value.
As mentioned by Abel in report, "This credit definition change is Creating a challenge for firms to implement the necessary operational and infrastructure changes."
A CDS portfolio will be consisted of ISDA 2014 credit definition trades, ISDA 2013 credit definition trades and mix of both,as explained below by one of the clearing house at OTC space.
New credit definitions will supersede the ISDA 2003 credit definitions. In 2003 credit definition ISDA had defined six credit events. Historically out of these six, restructuring credit event has been toughest contingency to contract for in a CDS. Contractual conditions affects the pricing of CDS. So there can be spread in 2014 ISDA CDS trade and already traded same CDS on 2003 ISDA definitions.
It is anticipated that market participants will begin to use the 2014 Definitions with the September 2014 credit default index swap roll date (i.e., September 22, 2014). The 2014 Definitions will apply to new trades only if so elected by the parties (e.g., by incorporating their terms into a trade confirm). Additionally, ISDA has released a draft protocol that parties can use to elect to have the 2014 Definitions apply to existing trades, although certain existing transactions such as sovereign CDS and CDS on European financial entities are expected to be excluded from the protocol given the substantial impact the changes could have on such trades’ terms and value.
As mentioned by Abel in report, "This credit definition change is Creating a challenge for firms to implement the necessary operational and infrastructure changes."
A CDS portfolio will be consisted of ISDA 2014 credit definition trades, ISDA 2013 credit definition trades and mix of both,as explained below by one of the clearing house at OTC space.
No comments:
Post a Comment