Japan’s credit derivatives industry will closely watch the results of the first meeting of the International Swaps and Derivatives Association’s new credit derivatives committee on market practices, on March 12. Committee members will be groping for a solution to the most controversial issue to hit the industry in its short existence.
The emotive subject, which turns on whether corporate debt restructuring should trigger a swap default payout, erupted last September when a group of 10 major banks in New York arbitrarily changed the rules. This resulted in a two-tier US market, with higher prices for default swaps that include a debt restructuring clause.
Although Isda has an existing credit derivatives committee, this is chiefly comprised of lawyers dealing with documentation. The first meeting of the new committee, aimed at bringing together deal-makers and traders, will video-link London and New York. Market heavyweights will chair each end – Blythe Masters, head of JP Morgan’s structured credit products in New York, and Paul Varotsis, executive director for structured credit trading at Lehman Brothers in London.
In Japan, the level of corporate restructuring is making the issue especially significant. Under present Isda documentation, a debt restructuring is one of several credit events – along with bankruptcy, failure to pay and debt repudiation – which oblige the seller of protection in a credit default swap to pay out. But the Japanese big banks, which are often large sellers of protection, say that creditors and lenders (buyers of protection) often do not lose out when a company restructures its debt, and therefore receive a windfall gain from a default swap payout.
In Japan, the level of corporate restructuring is making the issue especially significant. Under present Isda documentation, a debt restructuring is one of several credit events – along with bankruptcy, failure to pay and debt repudiation – which oblige the seller of protection in a credit default swap to pay out. But the Japanese big banks, which are often large sellers of protection, say that creditors and lenders (buyers of protection) often do not lose out when a company restructures its debt, and therefore receive a windfall gain from a default swap payout.
Among the possible solutions is a deletion of the restructuring clause from Isda documentation, or a new form of wording that draws much more tightly the
circumstances in which the clause is activated. Bank regulators are saying that if debt restructuring is not included in default swap contracts, there will have to be an increase in the amount of capital that banks must maintain against such deals.
For default swap traders in Japan, the problem is not just the high level of corporate restructuring, but also the lack of transparency surrounding such events and the close relationships between banks and their customers, says Terry Tanaka, head of legal and regulatory affairs in the international treasury department of the Industrial Bank of Japan, and an Isda board member. It is often very difficult for a protection seller to know what really goes on behind closed doors when one or two banks restructure their loans to a corporate customer. He cannot know which loans have been restructured, whether the creditors have actually lost any money, or whether they have received additional collateral. It creates the conditions for abuse, says Tanaka.
circumstances in which the clause is activated. Bank regulators are saying that if debt restructuring is not included in default swap contracts, there will have to be an increase in the amount of capital that banks must maintain against such deals.
For default swap traders in Japan, the problem is not just the high level of corporate restructuring, but also the lack of transparency surrounding such events and the close relationships between banks and their customers, says Terry Tanaka, head of legal and regulatory affairs in the international treasury department of the Industrial Bank of Japan, and an Isda board member. It is often very difficult for a protection seller to know what really goes on behind closed doors when one or two banks restructure their loans to a corporate customer. He cannot know which loans have been restructured, whether the creditors have actually lost any money, or whether they have received additional collateral. It creates the conditions for abuse, says Tanaka.
No hay comentarios:
Publicar un comentario