Psst! I’ve Got a Secret

Today we were treated to two news stories in two newspapers on one topic:  the process for determining whether a credit event has occurred with respect to Greek sovereign CDS.

On the one hand, there’s The Washington Post:  “For Greece, a critical conference call between London and New York.”  (A follow-up story is here.) On the other hand, there’s The Wall Street Journal’s “Hushed Up: Secret Panel Holds Fate of Greek CDS.”

An important part of the credit event process – and an important element in each story – are the ISDA Determinations Committees (DCs).  The DCs are 15-member panels of representatives from banks and investment firms.  A supermajority (12 of 15) of each DC’s members is required to make a determination.  Here’s how the Post describes the process and the DCs:

“The banks and other investors who buy and sell the swap contracts have agreed to the arrangement as a way to centralize what had been an ad hoc, company-to-company process of deciding whether a credit default swap payment was warranted.

“The committees are set up with competing interests in mind. The group meeting in London and New York on Thursday includes representatives of major European institutions like Deutsche Bank, as well as private investment funds like Blue Mountain Capital, that might have different points of view.

“A supermajority of 12 committee members is needed to make a determination either way, and if the panel deadlocks the issue would be sent to a new group of three outside arbiters. Some 59 cases have gone before ISDA committees so far without follow-up litigation, and only one has been referred to an outside panel.”

Contrast this with the Journal’s take.  First, there’s the headline about a “Secret Panel.”  The DCs are said to be “secretive” and “rarely elaborate on decisions.” “No outsiders can participate in the meeting…No transcript will be made public. When a decision is announced, expected before Monday, the committee doesn’t have to provide an explanation. There is no opportunity for investors to appeal.”  Critics “question the impartiality of the process.”

It’s a bit of a mystery why the story characterizes the process as so “secretive.”  The names of the firms on the DC are public, as are their votes.  The process by which the DC members are selected, and the rules governing the DCs, are also public.  Their decisions are publicly announced.  At times, public explanations for those decisions are provided, but often this does not appear to be necessary (such as when the vote is 15-0).

In addition, the process, as the Washington Post article notes, was built to address conflicts of interest.  The credit event/DC process has worked extremely well for 3+ years.  It has handled dozens of credit events without incurring a single legal challenge.  If a supermajority isn’t reached, the decision goes to a panel of outside experts.  A supermajority has not been reached only twice in all the times the DCs have agreed to consider a question.

In sum, we think the credit event/DC process is fair, transparent and well-tested.  There’s simply no evidence to the contrary.  Perhaps after today this non-secret secret will be a secret no more.

Note: ISDA’s EMEA Determinations Committee determined today that a credit event has not occurred with respect to recent questions on the Hellenic Republic restructuring. A copy of the press release is available on ISDA’s website.


20 thoughts on “Psst! I’ve Got a Secret

  1. Reblogged this on Risk Matters and commented:
    ISDA’s Media Comment blog offers a great critique of the Wall Street Journal’s coverage of the process to determine whether Greek sovereign credit default swaps have experienced a credit event as a result of the country’s latest debt restructuring.

  2. Isn’t it just common sense that is I buy insurance in order to remain ‘whole’ for an investment that I should receive an amount of compensation from that insurance to make me ‘whole’?

  3. Utterly corrupt. If I don’t pay 70% of my monthly mortgage, is that not a default either? The day of reckoning is coming for the banking cartel.

  4. As a teacher of logic and rhetoric who is relatively indifferent to the technicalities of default determinations, I will be using the ISDA’s post as a wonderful example of excessive rhetoric and specious argumentation that even exceeds that found in the articles the ISDA accuses of, well, excessive rhetoric and specious argumentation.Take paragraph 8 in comparison to the quotation from the WSJ in paragraph 7. ISDA does not dispute one matter of fact presented in the WSJ. Rather, it reinterprets the term “secretive,” implying that it disagrees on matter of fact while instead simply presenting a different set of facts. ISDA also seems to equate lack of legal challenge with effectiveness and fairness of process. Lack of legal challenge is a very low bar (pardon the pun). A process does not have conflicts of interest simply because there has been no legal challenge? Excuse my own rhetorical flourish, but pooh. And finally, “there is simply no evidence to the contrary.” Because, perhaps, anything that might be used as evidence to the contrary is “simply” not provided? If there is “simply” no evidence to the contrary, I recommend that you calm doubts by 1) releasing transcripts of your meeting and permitting a truly neutral outside observer to vouchsafe their content; 2) providing public explanations of your decisions as a matter of procedure whether or not you deem it necessary; and 3) allowing investors to appeal, rather than addressing the issue by blog post in which, to all appearances, thou doth protest too much. Then we would have a true test of whether there simply is no evidence to the contrary. I also highly recommend that you immediately hire someone who either actually knows how to put together an argument or is a more effective rhetorician, prefereably both.

  5. Of course an event occurred. Either the ISDA is living in a dreamworld (and, therefore, negligent) or it is disingenuous. Neither inspires confidence.

  6. Why should anyone ever purchase a CDS again? The concept of impartial arbitration/settlement for the necessary functioning of contract law has been castrated. The road to hell is paved with good intentions. Moral hazard rules,…….. or should I say immoral.

  7. However you want to characterize the ISDA proceedings for determining if the write-downs of Greek bonds constitutes an event that should trigger the CDS, the fact is that is is obvious to all that the losses have been forced on the private holders of the bonds who had bought CDS in good faith with the expectation that they would insure their value. This is especially wrongful and patently unfair when other holders of the same bonds, such as central banks, were not forced to take the same medicine. When someone buys a bond, they are expressing a vote of confidence in the issuer of the bond. Why should anyone consider buying Greek bonds, or any Euro-denominated bond in the future, since they now know that they can/will be treated unfairly when time for payment arrives, and they cannot insure their holding against loss?

  8. Soooo, a 70% debt writedown is NOT a credit event? Can I go to my mortgageholder and get that deal without crashing my personal credit score? Hell no! If I am a dollar short, I could lose my house. If I miss three payments, I WILL lose my house. Why the double standard? This is the second (or is it the third) “restructuring” for Greece.
    Something smells fishy. You have made a case above that you are not secretive, but what about vested interests of the Banks who issues CDS contracts–are these not your employers? And that is no secret!

  9. So be it ISDA, change the CDS default rules at will. A 70% hair cut is a form of default! The outcome will be the end of credit default swap market and that is a positive!

  10. Greece is in default by the ratings agencies, is only paying back a small part of what they owe and there is no CDS triggering??? By all means move forward with that idea and we can kiss that whole market goodbye! I think I will take that approach with my mortgage next!

  11. I am sure that the process is “fair” to the CDS issuers. How can a 70% haircut not a default? Are you sure that this isn’t a special case for Greece?

  12. Your Determinations Committee is a sham and what you don’t realize is that you are killing your own market that you created as a way to hedge events like what is going on in Greece (and to speculate to increase your bank member’s revenues and profits). What happens when people stop using CDS to hedge because of the lack of integrity with your DC? There are other ways to hedge and to speculate. At this point the ISDA has severely damaged it’s credibility and the bank members who make up your DC are self serving, only making decisions based on counter party risk to their own firms. Just the fact that the ECB has subordinated all other creditors should be considered a default and a credit event. Are you really willing to blow up the CDS market as a hedging vehicle in it’s entirety? Once we reach the end of the PSI process for Greece and once the CACs are triggered, the DC must view this as a credit event or you are done.

  13. The terms used to describe the process as Fair, Transparent and well-tested. I cannot comment on the fair and well-tested aspects of the process…although if taking 70% cut on the original price would logically indicate default. If a private company does something similar would that be a credit event?

    Whether or not the process is Fair or well-tested, the process certainly is not transparent. What part of the decision making process in this case do you say is transparent. Or did you just think that saying the same word many times will convince people otherwise?

  14. Pingback: Griekse tragedìe; deel 6340734073206 « hyperinflatie

  15. I can not understand what the blogosphere, media are spewing.

    Ofcourse the change of seniorage of another bondholder vs your bonds cannot be a Credit Event as the there has been no loss to you. The loss is taken when something happens and you actually loose money because of that arrangement/change to the contracts. Then I bet it would be a credit event.

    And including CAC’s retroactively. Yeah, why not? It’s absolutely logical that ISDA has not declared a credit event because of this. The logic being, they have not enforced the rule! No enforcement of the CAC = no loss to you, therefor no pay out of insurance because of loss.

    Declaring a Credit Event before the fact would be like me getting money from my car insurance before I actually crash my car.

    Am I totally wrong here?

  16. I wonder if I went into your personal bank account or maybe your bond porfolio account and removed 70%…just curious what you would call that…..let’s assume you had insurance against this “loss”….explain that to the wife

  17. Pingback: FT Alphaville » Did your grandma buy Greece CDS or what?

  18. Your assertion that this latest decision on Greece was done with complete transparency is patently false. The press release from the DC reference the ISDA 2003 definition of subordination, but that definition is not in the public domain. Putting the definitions of credit events behind a $350 pay-wall is not transparent. If ISDA wants to allay the concerns of market participants and the public, they should start by making the full text of the 2003 Credit Derivatives Definitions freely available on their website.

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