The dealers and buysiders working together to develop a framework and ground rules for loan-deliverable credit default swaps are close to putting the finishing touches on settlement and confirm procedures. The group is scheduled to meet again next week and is aiming to have a document ready for the ratings agencies by early February.
The settlement group is working with lawyers on procedures so desks do not have to wait a year or so to settle the CDS. "We are looking at a physical settlement standard because that is the way traditional loan guys have worked," said Jeremy Vogelmann, a loan CDS trader at Lehman Brothers who is involved in the talks. "They know the loan and security under the loan, and expect a high recovery based on their collateral."
Another subcommittee is working on a form approved confirm. The goal is get a standard confirm preapproved by the ratings agencies. Because it can often take a while for the ratings agencies to approve a particular form of documentation for a confirm before it can be used for a trade going into a CLO, a preapproved form would save the CLO time and money.
Around the same time the group goes to the ratings agencies, it also hopes to bring a prepared document to the International Swaps and Derivatives Association. The Loan Syndications and Trading Association has already started to get involved with the discussions. "Credit default swaps will have increasing importance in the loan market," said Elliot Ganz, executive v.p. and general counsel of the LSTA. "The LSTA expects to play a role in the implementation of practices."
The group is also working with market partners, so when the product is active, it will be easier to narrow down which loans for a specific company would be deliverable following a credit event. The outside group will help keep track of which loans have been refinanced and poll dealers on which loans are defined as first liens and second liens, to keep track of which would be deliverable.
Doug Grossberg, a loan CDS trader at Credit Suisse First Boston involved in the talks, said a streamlined, standardized approach to CDS should have a profound impact on the loan market. "Assuming this really takes off, you are going to see flows in the loan market affected by flows in the CDS market," he said. "You might see pricing on CDS impact new issue pricing."
