International Swaps and Derivatives Association
Greek Sovereign Debt Q&A (Update)
The following are responses to the most frequently-asked questions that ISDA has received in
connection with the application of credit derivatives to a potential restructuring or
reprofiling of Greek sovereign debt. The following does not constitute legal advice, and is
subject in all respects to any determination that the ISDA EMEA Credit Derivatives
Determinations Committee may make in relation to CDS referencing the Hellenic Republic
(Greece). ISDA makes no comment on the likelihood of the events described in this Q&A.
UPDATE OCTOBER 27:
The determination of whether the Eurozone deal with regard to Greece is a credit event
under CDS documentation will be made by ISDA’s EMEA Determinations Committee
when the proposal is formally signed, and if a market participant requests a ruling from
the DC. Based on what we know it appears from preliminary news reports that the
bond restructuring is voluntary and not binding on all bondholders. As such, it does
not appear to be likely that the restructuring will trigger payments under existing CDS
contracts. In addition, it is important to note that the restructuring proposal is not yet
at the stage at which the ISDA Determinations Committee would be likely to accept a
request to determine whether a credit event has occurred.
INFORMATION ORIGINALLY POSTED ON JULY 8:
How are Credit Default Swaps documented?
The vast majority of Credit Default Swaps (CDS) are documented using the 2003 ISDA
Credit Derivatives Definitions, as supplemented by the July 2009 Supplement. The
Definitions can be obtained from ISDA’s Bookstore.
What triggers CDS?
The CDS contract contains a number of elections that parties can make (for example, which
events from a menu of potential Credit Events will apply, what obligations are relevant for
triggering a Credit Event, what kind of obligation will be deliverable if a Credit Event
occurs). Of course, parties are free to agree to make whichever elections they wish, but
standard elections are generally used for particular transaction types (so, for example, some
of the elections for North American corporates, will be different from those for, say, Western
European Sovereigns).
A CDS is triggered when a Credit Event occurs. There are three Credit Events that are
typically used for Western European Sovereigns (including Greece), they are: Failure to Pay;
Repudiation/Moratorium and Restructuring. We will focus on Restructuring for these
purposes.
The Restructuring Credit Event is triggered if one of a defined list of events occurs, with
respect to a debt obligation such as a bond or a loan, as a result of a decline in
creditworthiness or financial condition of the reference entity. The listed events are: reduction
in the rate of interest or amount of principal payable (which would include a “haircut”);
deferral of payment of interest or principal (which would include an extension of maturity of
an outstanding obligation); subordination of the obligation; and change in the currency of payment to a currency that is not legal tender in a G7 country or a AAA-rated OECD country. The decline in creditworthiness or financial condition requirement is intended to filter out restructurings that occur as a result of improved financial condition
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