The International Swaps and Derivatives Association is expected to prepare an index protocol soon to help investors deal with trade settlement issues that have arisen in the wake of Delphi's bankruptcy filing. The protocol will aid in the settlement of credit derivative index contracts that include the bankrupt auto parts provider. Earlier this year, ISDA published similar protocols for Collins & Aikman, Delta Air Lines and Northwest Airlines following those bankruptcies.
The protocol allows institutions to amend their documentation for such index trades from physical to a cash settlement. These institutions will then be allowed to take part in an auction where the pricing on several bonds of Delphi will be determined by brokers. Markit Partners and Creditex are expected to administer the auction.
Nishul Saperia, v.p. of analytics and operations at Markit, said the first step is for dealers to hammer out what bonds are going to be included in the protocol. "The protocol is normally ready in about three weeks from start to finish," he said. "This situation may be a little different though because it [Delphi] is so big they may look to bring it forward as soon as possible." Saperia added that there is a much greater market push to include single name trades in this most recent protocol.
Saperia was unsure which bonds would be included in the Delphi protocol, but he commented that they usually pick the cheapest bonds. As of press time Thursday, no bonds had been chosen. He said that there is at least several billion dollars in trades left unsettled. Based on the reaction to previous protocols and early speculation, more than 500 accounts may sign up for the Delphi protocol. "CKC [Collins & Aikman] had 470 participants and this is bigger," Saperia said.
The auction for the bonds of the 2005 Delta Northwest CDS Index Protocol were priced on Oct. 11 with the cheapest bonds of Delta priced at $0.18 and Northwest's cheapest bonds priced at $0.28. Louise Marshall, spokeswoman at ISDA, would only say that an index protocol for Delphi is "under consideration."