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European Credit Dealers Choose Modified Restructuring Proposal

European credit derivatives dealers have agreed to back the so-called Aug. 27 restructuring proposal over a rival plan put forward by BNP Paribas in an attempt to present one voice in the restructuring definition debate in discussions with other participants, such as sellers of protection, end users and U.S. dealers. An e-mail sent last week by Robert Heathcote, managing director, and David Geen, senior legal consul at Goldman Sachs in London, said, "We must come to a conclusion which proposal the European dealer group are in support of, and then ensure that we back this proposal collectively and enthusiastically at the forthcoming ISDA market practice committee."

Restructuring language has proved to be the biggest headache for credit derivatives traders and lawyers as some sellers of protection insist on a rewrite or removal of the definition and European loan houses insist on including restructuring as a credit event for regulatory capital relief.

One credit professional said, "This was a vote for pragmatism," adding, that there is far more chance of the Aug. 27 proposal being accepted by U.S. dealers and the wider credit derivatives community. Heathcote and Geen's e-mail agreed.

Pierre Mathieu, head of credit default swap trading in Europe at BNP Paribas in London, said the proposals are similar, for example both eliminate bilateral loans as trigger obligations. However, he prefers the BNP proposal because, "All transactions would have a clear set of deliverable obligations that can be passed between market counterparties and at the same time it limits the deliverable obligation to five years or the maturity of the default swap hence reducing the cheapest to deliver risk in comparison to the old restructuring language."

Click here for proposal one.

Click here for proposal two.

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