FT Alphaville " Isda Greece credit event? There is Click images for Isda DC decision on Greece CDS, and statement Isda's given the credit event auction date for Greece CDS as March 19. Key points from the Isda FAQ on the Greece credit event "YES..." Why did the ISDA EMEA Determinations Committee rule that a credit event occurred? The Determinations Committee determined that the invoking of the collective action clauses by Greece to force all holders to accept the exchange offer for existing Greek debt constituted a credit event under the 2003 ISDA Credit Derivatives Definitions. Why did it take so long for the Determinations Committee to declare a credit event? A CDS is a legal contract between two counterparties. As such, it contains legal terms that are defined in the 2003 ISDA CDS Definitions. Those Definitions explain how the contracts work and the events that qualify as Credit Events. The Determinations Committee is required to use these Definitions and publicly available information in its deliberations. The DCs do not determine on a prospective basis if and whether a credit event might occur. That is why they sometimes reject questions submitted to them for consideration, and it is why sometimes they find that a credit event has not yet occurred. Now that a credit event has occurred, what happens next? Market participants conduct an auction through which the recovery value of Greek debt is determined. This recovery value determines the net payouts made under CDS contracts when a credit event occurs. The DC determined that an auction will be held in respect of outstanding Greek sovereign CDS transactions on March 19. How much will be paid out now that a CDS credit event has been triggered? According to the Depository Trust & Clearing Corporation's CDS data warehouse, the total net exposure of market participants who have sold CDS credit protection on Greek sovereign debt is approximately $3.2bn as of March 2, 2012. The net cash payout on CDS when a credit event occurs is the face amount of the CDS contract less the recovery value of the underlying obligations as determined at a CDS auction. For example, if the CDS auction showed the recovery value of debt to be (hypothetically) 25%, the aggregate amount payable would, in Greece's case, be 75% of $3.2bn: $2.4bn. Furthermore, statistics indicate that, on average, 70% of derivatives exposure is collateralized and the level of CDS collateralization is likely to be even higher as over 90% of CDS transactions (by numbers of trades) are collateralized. How can an auction be held if there are no "old bonds" because they have been exchanged for new bonds? The EMEA Determinations Committee will ultimately decide which of the obligations are deliverable under the Credit Derivatives Definitions for purposes of the Greek CDS settlement auction. It is important to note that Greece has outstanding a wide variety of obligations. Not all existing bonds are covered by the use of CACs. In addition, new bonds are being issued that might satisfy the requirements for deliverable obligations. Here's a chart from the DTCC of Greece CDS net exposure over time... Related links: Recent Greece CDS coverage - FT Alphaville How CDS gross and net notionals really work - FT Alphaville This entry was posted by Joseph Cotterill on Friday, March 9th, 2012 at 19:53 and is filed under Capital markets. Tagged with CDS, Greece, sovereign cds.