The International Swaps and Derivatives Association, Inc. (ISDA) today announced that the incorporation of the CDS settlement auctions into the 2003 ISDA Credit Derivatives Definitions — the so-called hardwiring process will be completed by mid-March 2009.
ISDA has agreed with regulators that it will publish the Auction Supplement and a “big-bang” Protocol at the beginning of March 2009. After a two-week adherence period, the Protocol and Supplement will become effective. Prior to that, ISDA will circulate drafts to its members for comment. At the time of publication, ISDA will arrange conference calls to explain the new terms and the process for adhering to the Protocol.
“The hardwiring process is a crucial part of the ongoing process undertaken to strengthen the infrastructure of the CDS market. ISDA and its members are keen to complete the work as soon as possible,” said Robert Pickel, executive director and chief executive officer, ISDA. “However, given the importance of this matter, it is essential that we take the time to ensure the process functions efficiently from day one.”
The Auction Supplement will amend the CDS Definitions to incorporate the CDS settlement auction terms that are currently included in the auction Protocols. It will also include provision for the ISDA Determinations Committee, which will make binding determinations for issues such as whether a Credit Event has occurred; whether an auction will be held; and whether a particular obligation is deliverable. The ISDA Determinations Committee will be an entirely new element in the hardwired structure and will play a central role in the market.
The amendments made by the Auction Supplement will apply to transactions entered into after the effective date, while the Protocol will facilitate the amendment of existing transactions to reflect the new terms.
In June 2008, ISDA and the major dealer firms stated to regulators their intention to publish an Auction Supplement and Protocol by December 31, 2008. However, this timetable was affected by the major market disruptions of September and October 2008, including the credit events relating to Fannie Mae, Freddie Mac, Lehman Brothers, Washington Mutual and the three Icelandic banks, the Lehman Brothers close-out, and the resulting accelerated timetable mandated for central counterparty clearing.
Since the start of September, ISDA hosted fifteen CDS settlement auctions, all of which have run smoothly.
Earlier in 2008, as the first stage of preparing a draft Auction Supplement, ISDA and the CDS dealer community identified the key issues that needed to be addressed and divided the work up into four dealer working groups: decision-making and dispute resolution; loan settlement; FX issues; and relationship between senior and subordinated auctions. ISDA also established a dealer decision-making group to make decisions on behalf of the other parties and a group for discussion amongst representatives of buy-side firms. These working groups have all made significant progress.
