A U.K. law firm has drafted a standard document for credit portfolio swaps in a move that could revolutionize the synthetic structured credit products market. A standard document could reduce drafting risk, save money on legal fees and speed up the time it takes to draft and rate the transactions, according to Chris Georgiou, partner at Ashurst Morris Crisp, the law firm that drafted the document, in London. Officials at CDO giants Morgan Stanley and JPMorgan said they would welcome a template that standardized the basic elements, such as the cash settlement procedure, of structured products.
Georgiou said, "This needed to be done," adding there was no advantage in starting drafting from scratch each time a bank issued a CDO. This is a good time to work on the document as the International Swaps and Derivatives Association's 2003 credit definitions are now finalized. However, he stressed that he did not expect this to be the finished document. "This is just a blueprint to have a discussion around."
The law firm is seeking market comment and will hand over the document to ISDA in the hope that it will be incorporated into credit derivatives documentation via a supplement if it gets a favorable reaction from practitioners, said Georgiou. Kimberly Summe, general counsel at ISDA in New York, said if Ashurst approaches it with the document it would gauge member support for such a template via its members and documentation committee.
The template would cover structured credit trades, such as synthetic collateralized debt obligations and n-to-default basket trades. These types of instruments account for around a quarter of credit derivatives notional volume, according to the British Bankers' Association.
Traders and lawyers were split over whether it was possible to produce a standard document for such highly specialized trades, especially as most of the products are sold to end investors rather than traded between the dealers. But one lawyer said investors are often confused and frustrated that each CDO house shows them a different document and would welcome the chance to be able to review the economics of a deal knowing the legal framework is sound. In addition, another lawyer said persuading the banks to ditch their tried and tested documentation may be a tall order. That said, most lawyers agreed portfolio swappers will adopt a market standard at some point. A credit professional explained, "There is always a life cycle between innovation and standardization." He predicted firms will adopt standardized documents when volumes squeeze margins and the most innovative firms move onto the next hot instrument.