Insurers and other sellers of credit derivatives protection thought Christmas had come early last week when they persuaded the International Swaps and Derivatives Association to back down on a proposed loosening of the burden of proof required to trigger a default swap. Kimberly Summe, general counsel at ISDA in New York, said, "The argument went full circle and we are now back to the 1999 definitions."
At issue was an ISDA proposal that would have substantially weakened the requirement to provide publicly available information supporting a credit event. The move threw end sellers of credit protection into a frenzy because they thought it would threaten the viability of the collateralized debt obligation market.
Buyers of protection, on the other hand, are convinced this was an attempt by the insurance companies to remove restructuring as a credit event definition via the back door and are not pleased with ISDA's decision.
According to ISDA documentation, in order to receive a payout on a credit-default swap the buyer must present the seller of protection with publicly available information, such as a newspaper article, that confirms the event. The furor started when buyers of protection successfully lobbied ISDA to change this requirement in a draft document. Buyers of protection started voicing their concerns over the original wording when protection sellers debated the publicly available information regarding a possible Xerox restructuring. The motivation to change the clause stepped up a gear when some sellers of protection, including Ace Guarantee Re, decided not to pay out on credit-default swaps referenced to Marconi because the publicly available information did not show there had been a credit event (DW, 12/1). Protection buyers said the argument over payouts should focus on whether there has been a credit event, not on whether there is pubic information to support it.
Lawyers said each camp was entrenched in their position. Carla Ranum at Ace Guaranty Re sent an e-mail to the end user committee on Monday, in which she stated, "If the initial burden is minimized and easily shifted, then the seller, which is not privy to the facts must either accept the notice and pay the claim or proceed to validate the claim and reserve judgment as to its validity." The e-mail went on to say disputing these claims could cost millions of dollars. Buyers of protection said this argument is effectively restructuring under a different name, as restructuring is the only credit event in which there can be a dispute over the public information. But, one seller of protection said there can also be disputes over bankruptcies, such as Marconi.
