The International Swaps and Derivatives Association was forced last week to send out a hasty retraction after its Tokyo office sent members an e-mail penned by JPMorgan that apparently signaled an about face on proposed credit derivatives documentation. The original e-mail, sent last Tuesday, infuriated traders in London and New York, who saw it as an attempt to sneak through the back door changes to a document that has been the subject of intense debate for the past year. Officials at ISDA and JPMorgan declined comment or did not return calls.
The trouble started when the e-mail hit the Tokyo market on Tuesday and was quickly circulating in London and then New York. The e-mail, which said that a 60 business day time limit should be imposed on settling credit contracts, appeared to carry the approval of ISDA, according to market practitioners. In fact, the JPMorgan-penned missive was erroneously sent out, they added.
ISDA sent out a clarification Wednesday after angry dealers had lit up its switchboard seeking clarification on the matter. In the follow up e-mail, ISDA wrote: "The...proposal is not an ISDA endorsed proposal and was not presented to or endorsed by its Credit Derivatives Market Practice Committee."
The controversial proposal to set a time limit on settlement has been kicked around since late last year but no consensus has been reached, said lawyers and dealers. It was then put on the back burner as other problems, such as what type of guarantees should be deemed acceptable, took lawyers' attention (DW, 5/19).
The proposed amendment to introduce a time limit on settlement is designed to eliminate basis risk between selling credit-linked notes and hedging with default swaps and has found many supporters in Europe. Under the standard 2003 ISDA definitions, under certain settlement scenarios protection buyers are not subject to a time limit on delivering defaulted assets against a credit default swap. This could expose dealers to basis risk that had bought protection in the form of a credit-linked note--which has a clearly defined final maturity--and hedged that with a default swap.
Opponents of the amendment argue that the default swaps should be aligned with the cash bond market--as set out in the standard 2003 credit definitions--rather than the structured credit market, added one lawyer.
Two co-chairs of the Japanese credit derivatives committee, Takeshi Gunji, manager in structured finance at Tokio Marine and Fire Insurance, and Nobukazu Saeki, senior manager for derivatives and structured products at Bank of Tokyo-Mitsubishi, told DW the e-mail was only sent out to Japanese sub committee members and should not have been circulated in Europe or the U.S. There are approximately 50 members of the Japanese sub committee.
