Creditflux Newsletter

Credit derivative dealers have scrapped a 31 December deadline to streamline the way that credit events are processed, and have yet to come up with a new timetable for the change. Banks had committed to regulators to "hardwire" cash-settlement by auctions into credit derivative documentation by the end of the year.

However, dealers say they are still pushing ahead with the plan. "We haven't agreed a new date and the regulators haven't agreed that we can have a new date," says a source close to the project. "Hardwiring is still moving forward, so the hope is that they will be sympathetic."

There are mitigating circumstances for the missed target, market participants point out. "There is so much on the table given the ongoing credit events, and potential credit events like GM in the US," says Adam Glass (left), partner, at Linklaters in New York. "Hardwiring is not at the top of the agenda."
Nonetheless, an Isda spokesperson insists that the industry is "working to fullest capacity in completing the hardwiring of the auction mechanism in the shortest possible timeframe".

Even in calmer markets, hardwiring was never going to be simple. Replacing a voluntary process means finding a mechanism for deciding whether credit events have occurred and for resolving disputes - two of the oldest and most intractable problems facing the credit derivatives market.
Agreement is reported to be coalescing around the idea of having an Isda determinations committee consisting of dealers and buyside firms, together with a dispute resolution panel drawn from credit derivative lawyers.

"Isda has been successful in establishing market consensus by seeking outside counsel opinions, but those are not binding on Isda members," says Glass. "It's a big leap from having Isda seek expert advice, to giving up your right to your day in court and having a dispute resolution process be the final arbiter of what the credit derivatives definitions mean."