The International Swaps and Derivatives Association, Inc. (“ISDA”) published the 2014 ISDA Credit Derivatives Definitions (the “2014 Definitions”) earlier this year. The 2014 Definitions will become effective on September 22, 2014 in respect of new credit default swaps (“CDS”) transacted on or after that date. In August, ISDA published the 2014 ISDA Credit Derivatives Definitions Protocol (the “Protocol”) in order to permit parties to retroactively amend their existing CDS which are governed by previous ISDA definitions so that they (subject to certain exceptions) will be governed by the 2014 Definitions. The deadline for adherence to the Protocol was set at September 12, 2014. ISDA announced today an extension of that deadline for adherence to 12:00 noon New York time on September 17, 2014.
The changes to CDS effected by the 2014 Definitions are numerous and complex. The changes are generally intended to improve the operation of the CDS market by clarifying ambiguities and closing unintended loopholes. It is possible, however, that certain of these changes could affect a party to an existing CDS in a positive or negative way, depending upon whether it is a Seller or a Buyer of credit protection under the CDS and upon the facts applicable to a specific Reference Entity and Credit Event. Accordingly, parties should consider carefully whether it is desirable for them to adhere to the Protocol.
Among the more important changes implemented by the 2014 Definitions are the following:
a) Creation of a new Credit Event described as Governmental Intervention, to cover a situation where a governmental authority takes action to effect a reorganization of the debts of certain financial institutions, such as by using its power to change applicable law or to expropriate or transfer the debt;
b) Expansion upon the concept of Deliverable Obligations in respect of certain sovereign and financial institution restructurings to include “Asset Package Delivery,” so the relevant CDS would be less likely to be in a position where there are no Deliverable Obligations; and
c) Changes to the Successor provisions to reduce the possibility that existing CDS will become “orphaned” with no Successor to the Reference Entity specified in the CDS.
In order to minimize the adverse economic impact to certain CDS market participants of adherence to the Protocol and to encourage the maximum possible adherence to the Protocol, ISDA has built in a number of exceptions to those existing CDS which will be retroactively amended by the Protocol. For example, the new Governmental Intervention Credit Event and the Asset Package Delivery terms will not apply to existing CDS entered into prior to September 22, 2014. In addition, ISDA has published a list of Excluded Reference Entities, and the existing CDS which name those as Reference Entities will not be amended by the Protocol.
A party who chooses not to adhere to the Protocol should also consider the possibility that its non-adherence may affect the willingness of swap dealers to trade CDS with them going forward, and it may affect the secondary market for their existing CDS.
If you have any questions regarding the foregoing, please contact Craig Hickernell (212-574-1399), Lauri Goodwyn (212-574-1249), Daniel Bresler (212-574-1203) or an attorney in the Investment Management Group at Seward & Kissel LLP.