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Derivatives

Firms Revisit CDS On CDO Template

Market makers are working with The International Swaps and Derivatives Association to create a new template for credit-default swaps on collateralized debt obligations that would tackle rating agency concerns circling the implied write-down option.

Market makers are working with The International Swaps and Derivatives Association to create a new template for credit-default swaps on collateralized debt obligations that would tackle rating agency concerns circling the implied write-down option. Implied write-down is a payment event triggered when a reference obligation is determined to be under-collateralized. Squabbling over whether or not to structure CDOs with implied write-down provisions has prevented structures from launching because some CDO managers have refused to do deals with shops that request documents that make no provision for implied write-downs.

Managers are stalling on the structures because they say they could get better pricing on securities that trade with implied write-down. "You go out in the market and find that the same securities come up again and again only trading with implied. Are you willing to forgo 50-60 basis points in premium there just to do a deal?" said a dealer, explaining manager concerns. He declined to comment on which firms were affected, but said several managers and investors have pulled out from deals recently for this reason.

A conference call was held Feb. 2 to discuss the template and emails are flying between lawyers about how to introduce language that guarantees protection buyers assume any implied write-down risk. "There's one dealer for every 10 lawyers on these calls," noted a dealer. "They send us proposals, we reject them," joked another about the slow progress of discussions.

Louise Marshall, spokeswoman for ISDA in New York, declined comment.

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