The International Swaps and Derivatives Association's 2003 credit derivatives definitions went live in June, but within hours the market was already talking about supplements and amendments.
The definitions, which were originally scheduled for 2002, took until June 2003 to go live because market practitioners could not agree on details such as the types of guarantees that are acceptable and the much debated restructuring credit definition, according to a senior legal consul in London. One of the biggest distractions was the de-merger of Six Continents, which highlighted a hole in the definitions before the ink was dry.
The week the document was due to go live an argument erupted about the acceptable timescale for delivering default obligations after a credit event. The U.S. market wanted to retain the original documentation and align the credit derivatives with the bond market, but the Europeans wanted to reduce the basis risk between credit derivatives and credit-linked notes.
In the ensuing melee both sides tried to enlist the support of the Asian dealer community. ISDA was forced to retract an e-mail sent to the market by its Tokyo office in June which seemly carried ISDA's endorsement for adding a 60-business day limit on settling contracts.
Things did not settle down after the definitions went live. Within hours traders realized that the so-called 'modified modified' restructuring definition favored by the European dealers did not work for subordinated insurance company debt, according to Patrick Clancy, counsel at Shearman & Sterling in London. After some deliberation about what to exclude, traders came to a consensus and decided to remove the maturity limitations for this type of debt.
Simon Firth, partner at Linklaters in London, said ISDA has decided against producing a users' guide to the credit derivatives definitions. The trade association is still writing one for equity contracts, but market participants feel a credit guide might be misused. For example, if a case were to go to court lawyers may use the guide to show standard market practice and lawyers fear this is not good for the industry, explained a lawyer.
