Compromise Plotted For Monoline, Dealer CDS Docs Impasse
Some industry players are working on finding a middle ground between monoline insurers and Street dealers who have been sparring for months over the documentation for credit-default swaps on asset-backed securities.
Some industry players are working on finding a middle ground between monoline insurers and Street dealers who have been sparring for months over the documentation for credit-default swaps on asset-backed securities. Lawyers for dealers trading on the existing U.S. templates said they are working on creating a hybrid between the dealers' preferred template and the one used by monolines.
Mushrooming volumes and the absence of standardized terms for dealer-monoline trades has made the issue more pressing. "Right now, dealers have one form for trading with each other and one for trading with the monolines," one lawyer said. The two sides have refused to trade on the other's template (DW, 12/12). But trading only among themselves is proving impractical, as counterparties engage in individual negotiations for trading with one another. It is unclear exactly which firms are interested in the compromise, but the initiative seems to be coming from European dealers trading on U.S. forms, with the aim of avoiding individual negotiations.
The International Swaps and Derivatives Association earlier this year published two forms for trading U.S. CDS on ABS (DW, 10/21) with different terms for defining and settling credit events (DW, 11/4). Form I, published last June and being revised and updated now (DW, 12/19), provides either for pay-as-you-go or physical settlement and is used mostly by dealers trading with other dealers. Form II, which was published last week and provides only for PAUG settlement, will be used mostly by monolines trading with other end users. But lawyers said they have seen interest recently in creating a hybrid template that satisfies both users, as trade volume in this product multiplies.
An official at Ambac Financial Group, the insurer leading the monoline effort, said trading already occurs between dealers and end users, but on negotiated terms.
Louise Marshall, spokeswoman for ISDA, said no plans had officially been brought to her attention.