More than 1,400 institutional investors, hedge funds and banks have signed up to the provisions for credit default swaps (CDS), which were developed by banks, market infrastructure operators and the International Swaps and Derivatives Association (ISDA).
The move is the first update to ISDA’s documentation, which provides the legal basis for most of the world’s credit derivatives transactions, since 2003. CDS provide insurance against a default on bond payments and are used by investors to insure against risk and speculate on creditworthiness. However, some junior bondholders complained that they were not paid out in full during some high-profile debt crises. The government invoked a “voluntary” debt exchange during the Greek debt crisis, which did not trigger a credit event under ISDA’s rules, and meant not all bondholders were not paid out. Market participants were also initially confused when the Dutch government expropriated subordinated bonds for SNS Bank last year.
Updated definitions bring new provisions covering defaults into older trades. They include capturing government-led bail-ins, where investors are required by authorities to rescuing a bank. It also stipulates new definitions for restructuring sovereign debts that includes debt issued by third parties into which sovereign debt can be converted. The move affects both indices and single name credit default swaps.
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