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ISDA Publishes Latest Credit Definitions; Includes Qualifying Guarantees

The International Swaps and Derivatives Association last week released to members the second draft of the 2002 ISDA credit derivatives definitions. It incorporates four new provisions, including the completely new concept of qualifying guarantees. Industry lawyers said the second draft broadens the scope of the definitions and clarifies the first draft.

To see a copy of the second draft, click here. (in pdf format)

"This is a big chance for the market, having lived through a bunch of credit events, to get together and pool that experience and really take the definitions to the next level," said one lawyer. Don Thompson, managing director and associate general counsel at JPMorgan in New York, said the changes reflect a desire on the part of many market participants to make credit-default swaps as liquid as futures.

Kimberly Summe, general counsel at ISDA in New York, said it has included a definition on guarantees because of demand for more flexibility. In particular, the new draft defines a "Qualifying Guarantee" and also distinguishes between guarantees by affiliates and non-affiliates of those companies. An industry lawyer commented that this is one of the most exciting changes in the draft.

The other new clauses are intended to clarify restructuring, sovereign credit-default swaps and notice of physical settlement. The existing restructuring credit event definition has been expanded to include the restructuring of a guaranteed underlying obligation. The definition of the repudiation/moratorium credit event for sovereign credit-default swaps has been amended to make the test clearer. In addition, the "Notice of Intended Physical Settlement" has been amended to "Notice of Physical Settlement," to indicate that it is a binding contract.

One attorney said he welcomes the changes since using the 1999 definitions has been work-intensive. However, another lawyer said new definitions will actually add a whole new level of complexity since it is hard work educating customers and dealers. "You really need to know the provisions line by line and inside out and backward," he said.

The Credit Derivatives Market Practice Committee is set to discuss the draft Tuesday and ISDA is seeking comments by August 12. The definitions could be finalized this year, but that will depend on the magnitude of feedback ISDA receives on this current draft, said Summe.

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