The International Swaps and Derivatives Association, Inc. (ISDA) today announced market practice changes to the trading convention for credit default swaps (CDS) as an additional step towards achieving increased standardization, transparency and liquidity in the industry and further facilitating compression of offsetting trades and central clearing of CDS. These changes, which will take effect on Monday, June 22, include the adoption of fixed coupons, payable up-front for European trades, and a move from monthly to quarterly ‘roll’ dates in emerging market CDS transactions.
Changes will include the following:
* Firms will trade European CDS with fixed coupons of 25bp, 100bp, 500bp and 1000bp going forward;
* For the purposes of applying standard coupons retroactively to outstanding trades, firms may use additional standard coupons of 300bp and 750bp;
* With regard to trades for Latin America and Emerging European CDS, firms will switch from monthly to quarterly contract roll dates, a step towards further standardization and enhanced liquidity in emerging markets.
“The adoption of fixed coupons in Europe and standardized quarterly roll dates in emerging markets demonstrate ISDA’s and the industry’s continued efforts to enhance liquidity, transparency and operational efficiency in the privately negotiated derivatives business,” said Robert Pickel, executive director and chief executive officer, ISDA. "These changes are a major step in the standardization and simplification of CDS that will benefit the robustness of the product."
In addition to these market practice changes, the industry is finalizing details on the settlement of CDS that incorporate Restructuring as a credit event using the auction mechanism that has been employed effectively in 65 auctions to date. These terms will be implemented via ISDA’s ‘Small Bang’ Protocol and are anticipated to go into effect July 27. Further information will be available in the coming weeks.
