December 11, 2000 at 8:00 a.m. (New York Time) 32 Old Slip, Conference Room 23, New York and Peterborough Court, 133 Fleet Street, 10th Floor, London
Introduction
A joint meeting was held on December 11, 2000 in New York and London. Robert Pickel, General Counsel of the International Swaps and Derivatives Association, Inc. ("ISDA"), began the meeting by stating that the joint meeting held on November 13 in New York and London experienced some technical difficulties on the London side and that a second meeting was scheduled for the London participants on December 14 at 4:30 p.m. Mr. Pickel stated that unlike the November 13 meeting, this meeting's purpose was to begin to explore possible alternatives to the current situation. Mr. Pickel also stated that ISDA was in the process of establishing a Credit Derivatives Committee, primarily composed of members reflecting the trading practices perspective. Lastly, Mr. Pickel stated that the capital issue relating to restructuring was an important one and that this group should explore alternatives that work on the business side and then speak with regulators.
General Discussion
After each firm had the opportunity to present its views, Mr. Pickel began the discussion period by referring to the number of references made by firms to the development of a bifurcated market. He asked the participants if bifurcation was a major issue and asked if there were two liquid markets, what harm would be caused.
A participant in London stated that one issue is that the credit event is just occurring at a point when these securities are trading at a variety of prices. It is possible that the credit event is triggered too soon, although another participant noted that portfolio managers would state that the credit event is occurring at the right time.
A participant in New York stated that so long as there were different types of end users, those institutions will want different contracts. Even if two contracts ultimately result, it does not mean that ISDA should not draft standard language for both.
A number of participants expressed concern about market liquidity. It was stated that liquidity would dry up if this issue is not addressed in a timely manner. It was added that some investors would probably be willing to write restructuring protection and trying to unify this market was the wrong approach.
A participant in New York stated that a bifurcated market creates confusion among investors that institutions are attempting to obtain as customers. It also hurts liquidity. Another participant stated that the market should begin with competing standards and ultimately, a standard would be found. Another participant stated that that process would take too long.
A participant in New York stated that a possible solution was to draft two definitions of Restructuring and allow the market to decide which is the preferred solution. It was added that ISDA and this group could not dictate how the market would or should develop, but could provide standardized language.
Another participant stated that he agreed that there could be two agreements, but it must be clear that one agreement has Bond restructuring and the other has Loan restructuring with a much earlier trigger and essentially constituting a financial impairment contract.
A participant in New York asked if the Deliverables needed to be changed in the Definitions. The banks present agreed that such an amendment would be a possible option. Another participant added that there were, in essence, three options: a contract without restructuring; a contract with restructuring applicable to Bonds only; and a contract with restructuring applicable to Loans and Bonds, with only the restructured asset as the Deliverable Obligation. Another participant added that for the contract with restructuring applicable to Bonds only, selection criteria should be included. A third participant stated that the fewer the number of contracts presented to the market, the better the prospects for the market's development.
There was also discussion regarding when an extension of maturity becomes an impairment issue. A participant in New York stated that in a bank restructuring, banks sometimes provide the borrower more time to get its affairs in order. Another participant stated that this was a grace period.
Mr. Pickel then asked whether the participants could agree upon eliminating Section 4.7(iii), while leaving (i) and (ii) as they were. Participants expressed general agreement. With respect to Section 4.7(iii), it was pointed out that a distinction exists between short term deferral and longer periods. A participant in London added that this would add a layer of complexity. A participant in New York stated that the extension of maturity in (iii) should be eliminated. It was also stated that emerging market implications should be considered as well as which products should be traded on which document. Another participant stated that if (iii) was eliminated, that was equivalent to removing restructuring from the Definitions. Thus, if banks do not agree to eliminate (iii), the result would be two contracts.
Mr. Pickel then asked whether there were firms that this group had not included and should have included for completeness of the discussion. A participant in New York stated that many sellers of protection, such as insurance companies, hedge funds and money managers, were not ISDA members.
Mr. Pickel concluded the meeting by seeking a maximum of twelve to fifteen firms to work toward drafting a revised Restructuring definition to present to the New York and London groups. Mr. Pickel encouraged representation across the spectrum of market participants.
