The International Swaps and Derivatives Association has circulated the final draft of the new credit derivatives definitions and market players have set Feb. 1 as the date when the definitions go live. The trade association has opted to go for a compromise on the most contentious issue of defining a restructuring by including three definitions. Users can opt for either the so-called "modified modified" restructuring proposed by the European dealers, modified restructuring used in the U.S. and old restructuring Protection buyers can also opt to leave out restructuring altogether.
Credit derivatives dealers plan to start using the new definitions on Feb. 1., according to traders involved in the process. The final document will be published at the end of the month. Before that ISDA plans to publish a pre-publication draft, which will be circulated to the credit derivatives market practice committee either next week or the week of Dec. 16.
The market needs a set start date to eliminate basis risk, according to Simon Firth, partner at Linklaters in London. Otherwise a bank could execute a trade incorporating the old definitions and hedge it with a contract employing the new definitions, creating a potential time bomb if the underlying entity defaults.
For a full copy of the draft document go to DW's Web site (www.derivativesweek.com).
