Derivatives houses, including JPMorgan, Deutsche Bank and Goldman Sachs, have agreed to eliminate the acceleration and repudiation/moratorium triggers in European credit-default swap contracts for investment-grade corporates from today, aligning the European and U.S. markets. Demand from U.S. investors for collateralized debt obligations has driven the rating agencies to recommend a more standard contract, said lawyers and traders in London. "Part of the endeavor is to assist in creating a homogenous market so [investors] can purchase credit derivatives in either market," said Habib Motani, partner and head of derivatives at Clifford Chance.
The elimination of the triggers should have a positive effect on the market, allowing for further development of liquidity, according to traders. "Prices going forward will be assumed on three credit events, however, dealers will consider selling protection for a small premium on five credit events," said Antonio Di Flumeri, managing director and co-head of global investment-grade credit derivatives at Deutsche Bank. He, as well as other credit derivatives professionals, declined to quantify the likely premium.
Obligation acceleration is a credit event where bondholders ask for repayment before an issue matures, which can result in either failure to pay or in full repayment of the face value of the bond, explained a lawyer. This trigger is considered a soft credit event and is being eliminated because failure to pay is a default trigger in itself and full repayment would cause no loss of capital. Repudiation/moratorium is being eliminated because it is generally considered not applicable for non-sovereigns, since they can be challenged in court for refusing to pay obligations.
