Dealers in European loan-only credit default swaps appear set to agree on a contract that would allow for trades in both cancelable and non-cancelable forms. Dealers met Wednesday and one participant said there are still a number of things under discussion and it's too early to comment on what the final form will be. But he did say it looks like the contract will trade in both forms; giving participants the option to choose whether they want cancelable or non-cancelable. At issue now is whether the contract should be broadened beyond the reference obligation for the number of deliverables and include all secured debt. A European dealer anticipates the contract will be finalized in January, at the earliest.
In a cancelable document, if the loan gets refinanced and goes away, the trade also goes away. In a non-cancelable document, if the loan goes away, the trade stays. The banks had initially been trading on a document that allowed for cancelability, but a number of banks wanted to develop a contract that more closely resembles the U.S. version that trades with non-cancelable language. The International Swaps and Derivatives Association
had been working with banks to develop a European confirm that would include a non-cancelabe provision (CIN, 11/13).
Some U.S. dealers were concerned that there could be confusion if both options were given and trades were being done on different contracts.