The International Swaps and Derivatives Association could publish a draft cash settlement protocol for credit default swap trades as soon as the end of August, according to John Williams, an associate at law firm Allen & Overy. ISDA has been working on a cash settlement protocol to settle CDS trades over the past four months. The cash settlement procedure replaces a net physical settlement procedure, which is no longer under discussion. The cash settlement protocol would be similar to previous protocols the association has developed to cash settle CDS. The main difference is that the new protocol would include single-name trades instead of solely index trades. The final settlement price will be determined in an auction.
A buysider familiar with the protocol said dealers and investors have been holding conference calls weekly to discuss the protocol. He added that market participants will still be able to physically settle CDS trades. According to ISDA, the proposed protocol will permit entities that desire physical settlement to submit market orders. Any entity that desires to close out its physical position can do this by using the final price generated in the auction. "If you don't sign up to the protocol you retain the ability to physically settle," said an ISDA spokeswoman. She added that the association will not commit to a publishing timeline for a draft protocol.