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ISDA Panel To Review Greek CDS Trigger Query

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02/28/2012 | 04:36pm EDT

NEW YORK -- A special committee of the International Swaps and Derivatives Association has agreed to review recent developments in Greece's debt restructuring as a potential "credit event" that might trigger $3.2 billion of credit-default swaps on Greece for payouts.

The move may result in the country being officially declared in breach of its obligations to bondholders somewhat sooner than expected--even though Greece hasn't failed to honor payments and its restructuring deal with private creditors isn't yet complete.

ISDA said in a statement Tuesday that, as secretary to the so-called Determinations Committee that decides such matters for the CDS market, the committee will hold a meeting at 1100 GMT Thursday to determine whether to force payers of CDS protection on Greek sovereign bonds to compensate buyers.

The Determinations Committee said Monday it had until 1700 GMT Wednesday to either take up the request sent by an anonymous party to the committee or reject it.

The anonymous request asked the committee to consider whether moves that could force private investors to forgive 53.5% of the face value of Greek debt, while the European Central Bank got a better deal, constitutes mandatory subordination that should allow holders of CDS to collect compensation.

The ECB and national central banks "benefited from a change in the priority of payments as a result of the Hellenic Republic exclusively offering them the ability to exchange out of their eligible instruments prior to the [private creditor] exchange and [expected] implementation of" the collective-action clauses, the request read.

Under the 2003 Credit Derivatives definitions published by ISDA, a change in the payment priority ranking of any obligation, causing its subordination, is one of the events in restructuring that can trigger CDS for payouts--as long as it results from a deterioration in creditworthiness.

When queries are submitted anonymously, it takes two members of the committee to accept it; when the submitter is identified, it only takes only one.

In the event these are triggered for payouts, $3.2 billion is the maximum amount that could change hands between sellers and buyers. If CDS are triggered, buyers receive the face value of their debt, less the recovery value assigned to the affected bonds.

What isn't known is which behind-the-scenes operators will be responsible for the thumbs up or thumbs down, the way defendants in a courtroom would be made aware of members of a jury.

The decision makers' identities and their credentials are a closely guarded secret of the firms those individuals represent and of the International Swaps and Derivatives Association, a trade body for swaps that convenes a 15-member committee every time such a determination is requested of it.

ISDA's Determinations Committee for Europe comprises 10 voting dealer banks and five major investment firms named by ISDA. A supermajority of 12 must agree for a decision to be binding on CDS held by parties who have signed up to be bound by ISDA protocols.

The dealer firms constitute some of the largest investment banks in the world, and one committee member represents each. They are Bank of America Merrill Lynch, Barclays Capital, BNP Paribas, Credit Suisse, Deutsche Bank, Goldman Sachs, J.P. Morgan Chase, Morgan Stanley, Societe Generale and UBS. Meanwhile, the investment firms are similarly influential: BlueMountain Capital, Citadel, D.E. Shaw, Elliott Management Corp. and Pacific Investment Management Co.

-By Katy Burne, Dow Jones Newswires; 212-416-3084; katy.burne@dowjones.com

Stocks mentioned in the article
ChangeLast1st jan.
BNP PARIBAS 0.19% 40.605 Real-time Quote.2.67%
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