• Adds Auction Settlement as a new Settlement Method
• Creates Credit Derivatives Determinations Committees
• Adds Credit and Succession Event Backstop Dates
• Counterparties who wish to amend existing credit derivative transactions must execute and deliver Adherence Letter to the “Big Bang” Protocol by April 7, 2009
• Buyside institutions who wish to be considered for the Non-Dealer Committee (from which certain members of the Determinations Committees will be chosen) must notify ISDA by March 20, 2009

On March 12, 2009 the International Swaps and Derivatives Association, Inc. (“ISDA”) published the 2009 ISDA Credit Derivatives Determinations Committees and Auction Settlement Supplement to the 2003 ISDA Credit Derivatives Definitions (the “Supplement”). The Supplement (i) adds Auction Settlement as an additional Settlement Method that is hardwired into each credit derivative transaction, in lieu of ISDA’s past practice of adopting a separate auction settlement protocol at the time of each Credit Event, (ii) provides for the establishment by ISDA of Credit Derivatives Determinations Committees (“Determinations Committees”) for the purposes of making certain determinations in connection with credit derivative transactions, and (iii) adds the concepts of “Credit Event Backstop Date” and “Succession Event Backstop Date” with the goal of promoting the fungibility of credit derivative transactions. Also on March 12, ISDA published the 2009 ISDA Credit Derivatives Determinations Committees and Auction Settlement CDS Protocol (the “Protocol”), through which existing credit derivative transactions may be amended to incorporate the provisions of the Supplement in a “big bang” by a single Adherence Letter.

Counterparties who wish to amend existing credit derivative transactions must execute and deliver the Adherence Letter attached to the Protocol by April 7, 2009. Also, as the terms of the Supplement are expected to become the standard going forward, counterparties will need to consider whether they wish to adhere to such terms for new transactions.

The full texts of the Supplement and the Protocol are available on ISDA’s website at www.isda.org.

AUCTION SETTLEMENT

The Supplement adds Auction Settlement as an additional Settlement Method that is hardwired into each credit derivative transaction to which the Supplement applies, in lieu of ISDA’s past practice of adopting a separate auction settlement protocol at the time of each Credit Event. The new Settlement Method provides for an auction methodology to arrive at an auction final price at which credit default swaps will be settled following the occurrence of a Credit Event, and is similar to the methodology that has been recently used in auctions that have been held on a one-off basis due to concerns that counterparties would be unable to complete Physical Settlements. The auction methodology corresponding with the new Auction Settlement method is designed so that the auction procedures remain relatively consistent from auction to auction.

CREDIT DERIVATIVES DETERMINATIONS COMMITTEES

The Supplement also provides for the establishment by ISDA of Determinations Committees for the purposes of making certain determinations in connection with credit derivative transactions that have incorporated the Supplement in the relevant confirmation. The Determinations Committees have been deemed necessary by ISDA in connection with the new Auction Settlement method since such method dictates the need for a decision maker with respect to certain determinations.

Under the terms of the Supplement, the Determinations Committees will have a mandate to consider a broad range of issues, including but not limited to the following:

• With respect to Credit Events, determinations with respect to whether certain types of Credit Events have occurred, what constitutes “Publicly Available Information”, whether the “Repudiation/Moratorium Extension Condition” has been satisfied or whether a “Potential Failure to Pay” or a “Potential Repudiation/Moratorium” has occurred, and if applicable the dates relating to such events;
• Determinations on whether to hold one or more auctions following the occurrence of a Credit Event, as well as determinations with respect to the auction terms, including the auction date and the institutions that are eligible to bid, various determinations regarding the deliverable obligations for an auction, and any amendments to the auction methodology;
• Determinations with respect to whether an event that is a Succession Event has occurred, the legally effective date of such Succession Event, and the identity of the successors;
• Determinations with respect to whether circumstances that require a “Substitute Reference Obligation” to be identified have occurred and the identification of such a Substitute Reference Obligation; and
• Determinations with respect to whether a seller has merged with a reference entity.

The Determinations Committees will also have the mandate to make other determinations with respect to matters of contractual interpretation that are generally relevant to the credit derivatives market as a whole, as well as address interpretation questions regarding the provisions of the Protocol. Any market participant will be able to request that a Determinations Committee be convened to address a specific question.

The Determinations Committees will not make determinations with respect to Credit Events triggered solely by Restructurings, and the Auction Settlement protocol will not apply. In such cases, the settlement method specified in the applicable confirmations will govern.

A Determinations Committee will be formed for each ISDA region. Each Determinations Committee will consist of ten “Dealer Members” and five “Buyside” or “Non-Dealer Members” with voting authority. Of the ten Dealer Members, eight will be “global” and will thus serve on every Determinations Committee, while two will be “regional” and will only serve on the Determinations Committee for their own region. In addition, each Determinations Committee will have one “global” and one “regional” Dealer Member, and one Non-Dealer Member, who will serve as non-voting “Consultative Members”, or alternates.

All Dealer and Non-Dealer Members must have adhered to the Protocol. Non-Dealer Members will be selected at random from a pool of institutions constituting the “Non-Dealer Committee”. At least one of the Non-Dealer Members will be a hedge fund, and at least one other will be a traditional asset manager. Buyside institutions who wish to be considered for the Non-Dealer Committee must notify ISDA by March 20, 2009. The members of the Non-Dealer Committee will be chosen by March 31, 2009.

Each Determinations Committee member must vote in all decisions, with one absence allowed per year. Decisions will require a super-majority vote threshold of 80%, and should such a threshold not be achieved, the determinations will be referred to a panel of external reviewers. The panel of external reviewers will come from a pool of experts with respect to credit derivative transactions that have been nominated by other ISDA members. The decisions made by the Determinations Committees or by the external reviewers will be binding.

BACKSTOP DATES

With the intent of promoting the fungibility of credit derivative transactions, the Supplement also introduces the concepts of Credit Event Backstop Date and Succession Event Backstop Date. Rather than allowing for any event that occurs prior to the termination date of a transaction to trigger a Credit Event or a Succession Event, the new concepts provide that, to be effective, a Credit Event must have occurred no more than 60 days prior to notice being given to the relevant Determinations Committee, and a Succession Event must have occurred no more than 90 days prior to notice being given to the relevant Determinations Committee. The new concepts can be compared to applying a statute of limitations on triggering events, and promote the availability of information as notice has to be given within a relatively short period of time after the occurrence of a triggering event.

“BIG BANG” PROTOCOL FOR EXISTING TRANSACTIONS

In connection with the Supplement, ISDA has also released the Protocol, under which counterparties to existing credit derivative transactions may amend such existing transactions to incorporate the terms of the Supplement. Counterparties who wish to do so must sign the Protocol’s Adherence Letter and deliver the executed Adherence Letter to ISDA on or before April 7, 2009.

Certain types of credit derivative transactions, including loan-only transactions, U.S. municipal transactions, and CDS on ABS transactions (including but not limited to those with Reference Obligations or Deliverable Obligations linked to asset-backed securities, mortgage-backed securities and/or collateralized debt obligations), will constitute “Excluded Transactions” and will not be covered by the terms of the Protocol. In addition, the Auction Settlement terms of the Protocol will not apply to reference obligation-only transactions, preferred credit default swaps and fixed recovery transactions.

In adhering to the terms of the Protocol, counterparties should note that they may not specify additional provisions, conditions or limitations in their Adherence Letters, and that adherence to the Protocol is irrevocable. For existing credit derivative transactions to be amended, all counterparties to each transaction must agree to adhere to the terms of the Protocol. However, counterparties executing Adherence Letters may, by separate bilateral agreement(s), agree and specify that certain existing transactions are not to be covered by the terms of the Protocol.

Should all counterparties to an existing credit derivative transaction adhere to the terms of the Protocol, the terms of the Supplement with respect to Credit Determinations Committees and Auction Settlement will be effective for such existing transaction as of April 8, 2009. As of April 8, 2009, the Credit Event Backstop Date and Succession Event Backstop Date for such a transaction will be deemed to be the “Effective Date” of the transaction until June 20, 2009, at which point the 60 and 90 day restrictions will be in effect.

If you have any questions regarding this memorandum, please contact one of the attorneys listed below.