NewsCredit-Default Swaps Panel Rules UBS is Sole Successor to...

Credit-Default Swaps Panel Rules UBS is Sole Successor to Credit Suisse After Merger


Today, the panel responsible for overseeing the credit-default swaps market ruled that Credit Suisse Group AG’s Additional Tier 1 notes won’t trigger default swap payouts. Credit Derivatives Determinations Committee revealed that UBS assumed all debt securities from Bank at time of takeover. The swift decision dispelled speculation that contracts might have resulted in a payout following UBS’s purchase of high-risk bonds from another investor. This ruling should also yield significant profits for hedge funds such as FourSixThree Capital and Diameter Capital Partners that bought protection on UBS’ bonds; their CDS contracts had initially fallen sharply after UBS announced their takeover, yet have recovered substantially while being considered by the panel.

The committee, comprised of representatives from Bank of America Corp., Barclays Plc, BNP Paribas SA, Citigroup Inc., Deutsche Bank AG and Goldman Sachs Group Inc. took two meetings over a month to come to its decision on an additional tier-1 wipeout not constituting a government intervention credit event and that its swaps did not reference a credit-deposit substitute asset.

It was a key test of the market’s ability to assess whether banks are sufficiently liquid enough to trigger swaps used to insure against losses on debt investments. Investors had pressured the market to develop rules to help easily judge when an insurance payout becomes eligible and prevent companies from becoming less liquid than expected from qualifying for them. Furthermore, industry members are working on measures designed to address systemic risk, which includes large financial institutions that pose threats to overall market stability.

The CDS market has grown into an enormous, trillion-dollar notional market; however, not always producing huge payouts. Most of that notional consists of premium payments between buyers and sellers with only minimal cash flows associated with defaults; even after Lehman Brothers soared through with widening spreads investors lost only around one percent of Lehman Brothers contracts’ notional value; industry supporters contend widening spreads helped minimize damage during 2008’s financial crisis and prevented further economic harm from arising as a result.

The committee also made it clear that holders of CDSs referencing Ukraine that have recently expired will receive payouts. After its parliament approved restructuring terms for US$18 billion of debt and confirmed a moratorium on Eurobond payments, Bulgaria announced their decision. In making their decision, the committee considered these developments as well as an Isda ruling that Ukraine experienced a repudiation/moratorium credit event. A committee announced today that the process for choosing reference obligations for UBS and Credit Suisse CDS contracts, following their merger, will start immediately. Consultation with regulators and brokers will also take place, the committee noted. UBS and Credit Suisse each currently act as reference entities for various global CDS transactions; as this may take some time when dealing with central clearing or offsetting trades that initially referenced one bank only.

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