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ISDA Distributes Penultimate Credit Draft

The International Swaps and Derivatives Association has circulated what it expects to be the penultimate draft of credit derivatives definitions, which include a narrow definition of qualified guarantees. Kimberly Summe, general counsel in New York, said ISDA members have until Oct. 28 to comment, after which it will circulate a fourth and final draft in November. Go to DW's Web site ( to read the definitions.

This is the first draft to spell out the fine legal details of how definitions should be worded, whereas earlier drafts have focused on the broad contours of what factors should be included in standard credit derivatives documentation, said a lawyer in London. One of the contentious issues in the last draft was that it included a wide range of instruments under the definition of qualifying guarantees. Market players objected to the inclusion of some of these instruments because they would not want to receive them as deliverable obligations or because they believe there is not enough publicly available information about the instruments. ISDA has decided that certain types of guarantee, such as surety bonds, financial guarantee insurance policies and letters of credit, should not be included in the definitions.

However, ISDA members are still debating several issues. One of these is what types of qualified affiliate guarantees should be included in the definitions. At the moment the definitions allow for guarantees from parents to subsidiaries, but not guarantees from subsidiaries to parents--often called upstream guarantees. Some sellers of protection do not want to receive upstream guarantees, because the legal validity of the guarantee is often challenged. The trade association is asking members for feedback on of these types of guarantees.

ISDA has also asked members to decide whether a clause defining part of the bankruptcy credit event should be determined by more than two-thirds of creditors as a simple majority, or whether the more than two-thirds should be calculated according to percentage of debt held by each creditor. In addition, the latest draft asks members whether ISDA should drop a formulation for dispute resolution refereed by a disinterested third party, since no dealers have stepped forward to assume this role.

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