Monoline insurance firms are demanding dealers rework a draft template for credit-default swaps on asset-backed securities. The monolines say they will not sell dealers protection on the structures using the documentation as it is drafted because it does not allow them to set out their own terms on issues such as credit events and voting rights.
The insurers, who got together for a conference call with the International Swaps And Derivatives Association last Wednesday, agreed on structural points they want included in the template. As DW went to press last Friday, the insurers were putting these points to dealers, with Ambac Financial Group representing the end investors on the call. Peter Poillon, spokesman for Ambac in New York, confirmed the firm is representing the end investors, declining further comment.Louise Marshall, spokeswoman for ISDA, declined comment.
Dealers say getting agreement on a workable template is important for building the fledgling market (DW, 4/1), as it will mean transactions can be put together quickly, rather than being negotiated individually. But monoline officials say they have several concerns with the dealers' draft. One key problem is the dealers' template allows for so-called soft credit events, such as rating downgrades, on which the monolines will not sell protection. One monoline official said the insurers understand the difficulties of including voting rights on synthetic ABS, but they would like the documents to include an option for counterparties to negotiate a way round the voting right problem on deals where this applies.
"The dealers have all asked us to do these structures," said the official, who explained the transactions which have gone ahead have used privately negotiated documents. A U.S. lawyer said the structures are increasingly popular, particularly for mortgage-backed securities, but he is doubtful the template document will make its June due-date. The dealers require a certain amount of protection for the structure to be viable, but the monolines will not give way on issues such as soft credit events, he explained. "I am not sure if these differences are surmountable," he said. But the monoline official said the insurers will not back down. "This is our kick-back, we will not use this template as it stands in the draft," he finished.