UPDATE: Market Participant Asks ISDA If Greek CDS Have Been Triggered
--Anonymous participant queried committee, asking if Greek CDS have been triggered
--Argument is that Greece approved potential use of collective-action clauses
--And that may force losses on private creditors when ECB didn't take losses
--ISDA committee has until 5 p.m. GMT Wednesday to take up Greek CDS case
(Updates with comment from ISDA in third paragraph, adds details about the committee customs after fifth paragraph.)
By Katy Burne
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--An unidentified market participant has asked a committee of the International Swaps and Derivatives Association to rule on whether the passage of legislation approving collective-action clauses for Greek debt should trigger payouts on credit-default swaps tied to Greek sovereign bonds.
At stake are payouts from sellers of a net $3.2 billion of CDS on Greece currently outstanding, and the stigma associated with lending credence to an instrument policymakers have long reviled.
ISDA said in a statement the Determinations Committee will decide by 5 p.m. GMT on Wednesday "whether to accept the question for deliberation or reject it." Only after the committee has opted to review the case would the committee then consider whether sellers of Greek CDS should pay buyers of the protection.
The anonymous request asks the ISDA 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 and national central banks 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 exchange and [expected] implementation of" the collective-action clauses, the request reads.
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.
The request comes before the formal bond exchange with private creditors has occurred, and just after the ECB participated its own beneficial bond swap, getting new Greek bonds that will not contain the collective action clause provision, thereby not taking losses.
If the ISDA committee decides not to take up the case, it would not have to say why. But as a result of the exchange with private creditors not yet having occurred, the ISDA committee may decide it is not the right time to consider the request, in favor of reviewing it after the exchange has occurred.
Despite this, an ISDA spokesman said the committee has a "very well-defined, well-tested and transparent process for determining if a credit event has occurred."
As of October 2009, regional Determinations Committees convened by ISDA to make such decisions on CDS created a new category under which any matter deemed of general interest to the marketplace could be submitted as a potential query. Participants have the option of remaining anonymous or identifying themselves when posting a general query.
The first stage of allowing the ISDA committee to accept or reject a case is meant to filter out frivolous cases. 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.
A net $3.2 billion of CDS are outstanding on Greek debt once offsetting contracts have been taken into account, according to the latest Depository Trust & Clearing Corp. figures. Without netting, the daisy chain of contracts between buyers and sellers amounts to a gross $69.9 billion of CDS outstanding.
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.
As of Monday, the recovery value assigned to Greek debt is about 26 cents on the dollar, as measured by the price of five-year CDS now at 74 points upfront, a new record high.
The elevated CDS price implies a 95% to 100% cumulative probability of default over the next five years, according to Markit data. It translates to an upfront cost of $7.4 million at the outset of the protection contract, as well as $500,000 in annual coupon payments, to cover $10 million of Greek bonds over five years.
"There is a realization that even if we get a deal and the next bailout tranche is likely to be forthcoming [for Greece], you're likely to have a credit event if [collective-action clauses] are used and people are thinking that is quite likely," said Otis Casey, credit analyst at Markit. "The odds of getting voluntary participation high enough, with people agreeing to take that much of a write-down, people believe is small."
Credit Suisse said in a research note Monday that it believes CACs will be introduced into Greek law debt, after being approved by the Greek parliament last week, and that a CDS credit event for Greece is "probable" on March 9. The private debt-exchange offer closes March 8.
