The Credit Risk Mitigation subcommittee of the Basel Committee on Banking Supervision has said it will recommended that restructuring is not required as a definition of a credit event in credit-default swaps in order for the buyer to get regulatory capital relief, except where the protection buyer has no control over restructuring events. Robert Pickel, ceo at the International Swaps and Derivatives Association in New York, welcomed the move saying the decision demonstrates more latitude on the issue than Basel has previously shown. He noted, however, that the final say on the matter rests with the Basel committee.
In spite of market support for the decision, some credit derivatives professionals said it is couched in narrow terms and question what influence the decision will have in the U.S., where minority protection buyers do not have control over restructuring events. These buyers will continue to require restructuring as a credit event.
The European and U.S. markets have different rules on restructuring, explained one derivatives attorney. In the U.S., a restructuring is typically allowed to proceed where borrowers of 67% or higher of the notional value of the contracts agree, explained one attorney. In Europe, however, the provisions vary widely between countries and in the U.K. the practice of undergoing restructuring with a majority consent is less common than in the U.S. There is a lot of variation between different loan agreements and bond prospectuses with respect to whether an investor has a right of veto, said Chris Francis, head of international credit research at Merrill Lynch in London.
