Thursday, March 01, 2012

ISDA and Greece.

Interesting. No credit event as defined by ISDA defintions with respect to Greek restructuring.

The first test concerned subordination of existing Greek Bond holders, which does not interest me as its fairly straightforward since subordination and dilution in one form or another occur every day in the debt markets. Constituting this as a "credit event" would collapse the entire system.

However, the "Restructuring" as credit event question is more compelling:

The second submitted question (DC Issue 2012022901) asked whether there had been any agreement between the Hellenic Republic and the holders of private Greek debt which constitutes a Restructuring Credit Event. (The full text of the question is available here
The EMEA DC determined that it had not received any evidence of an agreement which meets the requirements of Section 4.7(a) of the 2003 Definitions and therefore based on the facts available to it, the EMEA DC unanimously determined that a Restructuring Credit Event has not occurred under Section 4.7(a) of the 2003 Definitions.

The definitions of "restructuring" include an ex-post requirement of a deterioration in credit conditions ("material adverse change") based on the restructuring. This nearly obviates restructuring as a "credit event" and introduces some time requirement to determine if material adverse change in credit conditions has in fact occurred. This is obviously quite important to leveraged protection buyers as CDS sellers hold an option with unknown expiry and strike from the date of "Restructuring". As I have said before, the handmaiden to arguments are definitions and assumptions. No doubt more tests of the ISDA regarding both are incoming.

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