The International Swaps and Derivatives Association, Inc. (“ISDA”) will be updating its 2003 international credit derivatives definitions this September. Though the final definitions of this year’s update have yet to be published, some details have already emerged. For example, there will be a new credit event that would occur as a result of a governmental debt write-offs of a financial reference entity. The update will also include basic, commonly used terms associated with credit derivatives transactions.
The ISDA has been working with clearing housing and infrastructure providers since the beginning of the year to create a schedule for rolling out the definitions and also to determine the infrastructure changes that are necessary to support the new releases. A steering committee was considering an earlier release, but decided against such a move when it became clear that doing so could cause difficulties for market participants and providers and have a significant impact on the market.
The Dodd-Frank Act of 2010, among other factors, compelled the organization to make the definitional changes, which include new terms like “sovereign CDS asset package delivery for CDS contracts on sovereign reference entities” (which allows a credit event to be settled by delivering assets that convert sovereign debt) and “standard reference obligation” (which permits a standardized reference obligation to be adopted for all credit default swap contracts where the reference entity and seniority level are the same). Updated terms like “expanding the scope of guarantees that can be hedged with CDS” and “adjustments to the restructuring settlement mechanism” are also included.
The ISDA, established in 1985, is comprised of more than eight hundred member organizations from over sixty countries, and includes a number of corporations, insurance companies, international and regional banks, and even government entities.