Representatives of the U.S. credit derivatives market voted against implementing a restructuring definition proposed by European credit professionals by a majority of around 2:1 at last week's International Swaps and Derivatives Association meeting, according to bankers who attended the meeting. The vote, albeit informal and unbinding, is a major setback for efforts to establish a global restructuring definition. The meeting, which was attended by about 60 credit derivatives professionals, was held via video conference at Goldman Sachs' New York and London offices. Only about 20 of the attendees voted on the question of whether the U.S. market should adopt the Aug. 27 definition, also known as "modified-modified restructuring."
However, some European market participants are still optimistic that a global restructuring definition is viable. They think that once Europe has finalized the proposal and the traders can see it works it will garner more support. Paul Varotsis, executive director in the structured credit trading group at Lehman Brothers in London, thinks Europe will likely go ahead and introduce the new language and revisit the issue of the U.S. adopting it once the proposal becomes reality.
Although the U.S. community rejected the proposal, one New York official said he would be happy to accept modified-modified restructuring if it were offered in tandem with a contract without the restructuring trigger event. A standard liquid contract was vital to get the instrument off the ground, but now that it is an established market he advocates splitting the market globally into a no-restructuring contract, which would suit bond investors, and a contract with a restructuring trigger, which would mirror the loan market.
If the European credit derivatives market decides to opt for the Aug. 27 proposal it still has work to do on the cash settlement clause, according to lawyers, who said that mod-mod R restricts the amount of deliverable obligations so it needs to make the cash settlement fallback more robust.
