The International Swaps and Derivatives Association has convened a meeting for Tuesday, May 20, in which credit derivatives players will vote to accept a supplement on which forms of guarantee are acceptable in standard credit derivatives documentation. ISDA has leveled an ultimatum to its members to either accept the so-called Guaranteed Obligations Supplement in its current form or bin it. One of the most contentious issues is what percentage of ownership determines whether an affiliate is a related company. The supplement says that a 10% or greater ownership stake confers affiliate status, but the protection sellers want the level to be nearer 50%.
Kimberly Summe, general counsel at ISDA, sent an e-mail to the Credit Derivatives Market Practice Committee on May 16, soliciting members to vote on the proposal. In the event that the supplement is shot down, Europe will likely trade on the basis of "All Guarantees", while North America will trade according to "Qualifying Affiliate Guarantees," according to the e-mail, which was obtained by DW. A secondary vote will also be called for if the supplement is rejected, to determine whether a less comprehensive supplement, addressing the guaranteed subordinated debt and the determination time for assessing the voting shares, should be considered, it added.
Credit derivatives players in the U.S. are divided on whether the supplement will get passed. The supplement as a whole is a reasonable compromise and should be accepted, said one specialist at a New York-based dealer. "Much of the debate on the guarantee threshold has descended into the emotional, with the economic impact of the threshold being set at 10%, 30% or 50% being nil," he opined. One protection seller disagreed, stating that there is a huge legal difference in the thresholds and added that trades would not be facilitated by having a lower threshold. While the protection seller said he had not yet finalized his position going into the meeting, he will likely vote against the supplement.