A revised template of the cash or physical settlement for CDS on ABS, otherwise known as the European template, has been designed to replace the "disliked and unworkable" original version, said speakers. The new form, published by the International Swaps and Derivatives Association last Tuesday, includes a new synthetic settlement option, allowing delivery of a total-return swap upon a credit event. This effectively mimics the cash flows of the underlying asset and becomes more like the U.S. pay-as-you-go documents.
One buy-sider questioned why European dealers had not simply adopted the PAUG template in its entirety, rather than add the synthetic delivery option. This, however, was rebutted by traders who noted the two versions have been developed from different perspectives: cash settlement to mirror corporate CDS and PAUG as a financial guarantee. It was also noted extensive time and energy had been invested in developing both the first template, published in June 2005, and the new revision, and to go back to the drawing board would set back the market.
