Delphi's CDS Index Protocol, which is aimed at saving time and money settling credit derivative contracts related to the bankrupt auto parts maker, hit problems last week as some market participants said there was a flaw in the protocol's so-called fall-back methodology. The International Swaps and Derivatives Association, which drafted the protocol, was working to revise the methodology at press time. A new version was due out Friday morning.
The fall-back provision provides for a second auction to take place if the first auction, which is designed to determine the final price for certain Delphi bonds, fails to find a consensus on a final price for the bonds. A source familiar with the protocol said that problems could occur if there is a large discrepancy between the bid price and the offer price. A second auction, at which market participants can submit new bids, would apply pricing methodology to resolve this price discrepancy. He said certain market participants deem the methodology of the second auction to be too complicated. "Clients wanted something a bit simpler," he said.
Delphi's CDS protocol has taken longer to draft compared to the protocols for bankrupt airlines NorthWest Airlines and Delta Airlines. Delphi's protocol is more complicated because of the large amount of single-name and tranche trades. Single-name trades are not included in the protocol because it would have taken too long to include them, said Karel Engelen, policy director at ISDA. "Had we more time, we would have considered single-name trades, but because of the time constraints we just made sure that index trades were dealt with in the protocol," he said.
Delphi's notes included in the protocol are 6.55% '06 bonds, 6.5% '09 bonds, 6.5% '13 bonds and 7.125% '29 bonds.