The International Swaps and Derivatives Association has retained Sidley Austin as counsel and adviser to create documentation on alternative settlement procedures for loans as deliverable obligations. The documentation will define terms and conditions for using cash settlement, replacement derivatives and alternative forms of physical settlement to resolve difficulties such as default situations with insufficient stocks of loans for delivery.
ISDA set up a working group for this project late last year to head off potential problems arising from the dramatic increase in non-bank protection sellers (DW, 12/26). Protection sold by hedge funds is intrinsically less valuable than that sold by banks because the former don't have the same resources to back it up. A draft is expected later this year.
