ISDA: Greek Debt Exchange With CACs Triggers Credit Event, $3.2 Billion Net CDS Exposure Affected

ISDA has declared that the Greek debt exchange with CACs (collective action clauses) is a credit event that will trigger credit default swap payments. Below are the details along with a CNBC video with ISDA's CEO. Here is ISDA's official press release: "ISDA EMEA Determinations Committee: Restructuring Credit Event Has Occurred with Respect to The Hellenic Republic". But, ISDA's Q&A document (pdf) on the credit event provides more details. Look at the chart of Greek 5Y CDS at It is tradable insurance on Greek government bonds.

"Greek Sovereign CDS Credit Event Frequently Asked Questions (FAQ)
March 9, 2012

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."


"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.

The data regarding CDS exposures on Greek sovereign debt, and for the top 1,000 reference entities, are public. They are available here:

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."

ISDA published a preliminary list of obligations issued or guaranteed by the Hellenic Republic. The preliminary list can be accessed here:

(source: ISDA)

ISDA CEO Robert Pickel on the Greece sovereign credit event (CNBC):

"Well, the determinations committee will continue, in fact will meet again on Monday, where they will further consider the obligations that will be priced in that auction. Now, of course it's a little bit complicated in this situation with the restructuring, because certain obligations by virtue of this collective action clause implication will effectively go away. And so, we need to look at the bonds that are out there, or potentially even the package that has been offered as an exchange. So, it could be the international governed bonds, which have not been subject to a collective action clause yet. It could be the new bonds that are received in exchange, or it could even potentially be the package. That's something that the determinations committee will consider over the course of the day on Monday."

"What's important, though, is any of those 4% that have not tendered into this auction, or tendered into this exchange, will get the benefit of any CDS that they have outstanding. Because we'll move forward with an auction on all obligations. Once there's a credit event that's triggered, it's not specific to an obligation, it's more general as to the reference entity. So, anybody who holds any of those bonds, and has credit default swap protection, will be able to be made whole on their CDS. And then they just have to pursue whatever their remedies may be against the greek government on the underlying debt."

More perspectives:

Gross Says Greece Weakens Bond Contract Sanctity: Tom Keene (BusinessWeek)
Greece’s CDS: more lucky than smart: Felix Salmon (Reuters)
Greece: “A Harder Default To Come” (Testosterone Pit)
As First Greek CDS "Anstalt" Appears, A Question Emerges: Did Banks Not Square Off Margins? (ZeroHedge)
Greece Has Defaulted: Here Is Where We Stand (Zero Hedge)

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