There was no secret cabal determining whether the Greek bailout was a credit event or not.
On Thursday the International Swaps and Derivatives Association announced that the Greek bailout was not a credit event and would not trigger payments on the credit-default swaps (CDS) linked to the country’s bonds. But what many might think of as a secret group making this determination is actually a fairly open collection of banks and other entities. They are part of ISDA’s Determination Committees (DC), whose membership, rules, voting and decisions, are all, according to ISDA, “publicly announced.”
ISDA’s Determinations Committees were established in March 2009, “as a key element of the process by which CDS auction settlement was incorporated into standard ISDA CDS documentation.” There are five regional committees, each made up of 12 dealer firms, two of which are consultative (non-voting) and six are non-dealer (buy-side) members, one of which is consultative. The determinations are made in accordance with the criteria set out in the Determinations Committees Rules. Members include the usual suspect in global banking: Goldman Sachs, Barclays, Deutsche Bank, Bank of America et al. That these banks were in the decision is striking because they are by far the biggest CDS users. So their decision that the bailout was not a credit even may work in ISDA’s favor.
The Committees make binding determinations, such as whether a credit event has occurred, and in the case of Greece, it determined there wasn’t one. Two questions were posed to ISDA’s EMEA DC; one asked whether the Greek bondholders “had been subordinated to the ECB and certain NCBs whose bonds were acquired by the Hellenic Republic prior to the implementation of new Greek legislation such that such subordination constitutes a Restructuring Credit Event.” The second asked whether there had been “any agreement between the Hellenic Republic and the holders of private Greek debt which constitutes a Restructuring Credit Event.” The fact pattern didn’t support the first question and there was no evidence to support the second so the answer was no to both questions.
The DC was unanimous in its decision, and according to ISDA, more detailed public explanations are not provided when the vote is 15-0. In Media Comment blog, ISDA stressed that “the names of the firms on the DC are public, as are their votes. The process by which the DC members are selected, and the rules governing the DCs, are also public. Their decisions are publicly announced.”
Decision undermines CDS? Friday the FT in a story posed the question of whether ISDA’s ruling undermined the value of CDS. Some traders questioned the future of the product if such determinations are made in such a volatile geo-political climate. And even though most observers believe Greece will trigger a credit event next week, a coming debt swap – expected to result in the new bonds trading higher than old bonds – will still keep the insurance pay-out far from what would be need to make investors whole.
In its release, the EMEA DC held out some hope for investors by suggesting that the situation in Greece “is still evolving and [Thursday’s] EMEA DC decisions do not affect the right or ability of market participants to submit further questions to the EMEA DC relating to” Greece.
Greek bondholders will likely not hold their breath waiting for a 100 percent solution.