Following the steps taken by the Greek government to restructure its government debt, collective action was invoked by Greece to force all holders of its debt to accept a debt swap on their Greek debt holdings. This event resulted in ISDA declaring a credit event (on 9 March), which led to an auction (on 19 March) to settle payment of protection on CDS. In a Q&A, Andrew Douglas, Head of Public Affairs Europe, DTCC addresses some questions around the role of the DTCC Trade Information Warehouse (TIW) in the first ever European Sovereign CDS restructuring.
Q. What is the DTCC Trade Information Warehouse (TIW)?
The TIW provides post trade processing of OTC credit derivative contracts thus maintaining the records up-to-date. Prior to this, many of the processes were paper-based and handled manually which, given the very strict deadlines, created great inefficiencies.
Q. What is a restructuring versus a default event?
A ‘default’ is a bankruptcy or a failure-to-pay event, which impacts all the credit default contracts on the defaulting entity. A restructuring event often involves the restructuring of the underlying bonds to a credit default swap (CDS) contract, with the option to receive a pay-out on any CDS contract related to that entity name.
The key difference here is optionality. For a restructuring, the CDS protection can remain in place in case of any further restructuring, bankruptcy event or failure-to-pay, or the pay-out can be taken on this transaction by delivering a credit event notice (a trigger). For a default event all covered products receive the auction pay-out if an auction is held. In the case of Greece, this was determined to be a restructuring, not a default event.
Q. What is ISDA’s role in a restructuring event?
Through its Determination Committee, the International Swaps and Derivatives Association (ISDA) is responsible for deciding whether a credit event has taken place, and thereafter whether to hold an auction (or auctions) for that event. Part of ISDA’s decision-making process on whether to have an auction is based on the volume of transactions in the TIW for the credit market. The TIW provides data on aggregate anonymised exposure to a given name.
Q. What is a CDS restructuring auction?
The role of the restructuring auction is to determine the market price at which the triggered transactions will settle. It is run jointly by Creditex and Markit.
In the first part of the auction, the broker-dealers place bids and offers to make a market in the underlying bonds being restructured. The final auction price is derived by pairing up the bids and offers and the limit orders. It is this final auction price which enables participants to cash settle their CDS contracts in a single net payment to each counterparty.
Q. What is the role of a trade repository in the restructuring auction process?
Provision of data for the ISDA DC and public reporting
As mentioned earlier, part of the ISDA decision process on whether or not to hold an auction is based on the volume of the anonymised CDS transactions in the TIW. DTCC also publishes data on aggregate anonymised trade volumes and notional exposures via its public website.
Provision of data for prudential and market regulators
In addition to the aggregated and anonymised data which DTCC publishes on its public website, it also makes more detailed data available to prudential and market regulators. This data is regularly available to registered regulators, as well as being of particular use in the run up to credit events by providing additional transparency on the distribution of credit transactions on the entity name impacted by the event.
During the event
As the TIW holds trade data on the majority (98%+) of credit derivative transactions it is uniquely placed to offer additional central services on those transactions, particularly during a credit or restructuring event
Automatic reversioning of index transactions
One of the initial processes in a restructuring event is to have impacted index transactions reversioned to a new version of the index that excludes the restructured entity. The TIW automatically processes these trade amendments on an agreed date after the determination date, following which firms book the single name CDS trade that is spun off from that index transaction.
Electronic delivery of credit event notices
Through the DTCC restructuring portal, the TIW allows firms to view all of the transactions they hold in the TIW that are impacted by the restructuring event, and to deliver a credit event notice to their counterparties electronically via that screen. This same screen provides real-time notification of the delivery of their credit event notice and informs them of any credit event notices delivered against them by their counterparties.
The TIW also provides up to date information of the impact of any delivered credit event notices on their transactions.
Application of auction price to triggered transactions to calculate the payout due on the CDS
Once the auction takes place and the final price is agreed, the TIW applies the price to all the triggered transactions to calculate the payout that is due on any triggered CDS contract, and also calculates the impact on any coupon accruals. The TIW also produces reports for participants showing their net cashflows for the event once the auction results have been processed.
In this case, holders of Greek CDS had from the moment the credit event was declared (9 March), until 4.00pm GMT one relevant business day before the auction (Friday 16 March) to trigger the pay-out on a CDS transaction. For the Greek event the timeline for completing the event was accelerated from the timelines often used for restructuring events. The information and central processing capabilities of the TIW played a significant role in assisting the market with meeting this short timeline.
When the ISDA DC determines that an auction will be held a cash settlement date is agreed for the settlement of the resultant cash flows. In this instance, the date was set to coincide with the time when the Greek government finalised its debt restructuring – five business days after the auction, Friday 23 March.
Central settlement of event cash flows
For participants that have elected to use the TIW central settlement service which is offered via CLS bank, their net cashflows for all transactions settling on the auction cash settlement date are centrally netted and processed automatically.
Q. Has the Trade Information Warehouse been involved in other credit events?
The TIW has been involved in processing 111 credit events, 12 restructuring events and 367 succession events since event processing was introduced in the TIW in 2008, predominantly on corporates. Greece is the first sovereign restructuring event in Europe and the largest such event globally.