The International Swaps and Derivatives Association is preparing a draft protocol for settlement of credit events, after failing to garner support for its net physical settlement proposal last month. Louise Marshall, ISDA spokeswoman, said the new version is intended to reflect feedback to a March 2 meeting on the draft Net Physical Settlement Supplement to the 2003 ISDA Credit Derivatives Definitions (DW, 2/17).
The proposed protocol and auction methodology will be similar to the past three North American credit derivatives index protocols, but will cover single-name and bespoke tranche trades as well as index trades, and provide an option for physical or cash settlement. Players wanting to physically settle will be able to submit market orders and those wanting to cash settle will be able to do so at the final price determined by the auction. Under net physical settlement that was not guaranteed unless a position was under USD1 million.
Marshall said ISDA will circulate the proposal for feedback to the credit derivatives market practice committee in mid-May. As an interim step, the trade group plans to use the protocol for the next few credit events and gather feedback for a longer-term solution. Once a solution is determined, ISDA will either revise the 2003 ISDA Credit Derivatives Definitions or add a supplement. She declined comment on timing for the initiative or a final protocol.