Swaps Succession Protection Not In The Offing

Nov 30 2006 | 10:18am ET

Hedge funds and other credit default swap investors hoping for succession protection from the International Swaps and Derivatives Association appear to be out of luck.

Proposed changes to the 2003 Credit Derivatives definitions—expected in the spring—will not offer protection to holders of CDS following financial restructurings, debt redemptions or leveraged buyouts, ISDA General Counsel Kimberly Summe told Reuters.

Hedge funds are big players in the $20 trillion CDS market. Last month, $3.6 billion hedge fund BlueMountain Capital suffered big losses when it sold swaps on Cablecom bonds, only to have Cablecom buyer Liberty Global decide not to cancel Cablecom’s existing debt. That sent the price of default protection through the roof. According to a recent Merrill Lynch survey, nearly 70% of investors are concerned about succession issues and CDS orphaning.

“We have agreed we would likely not make significant changes, but rather modest amendments,” Summe said. “There are not many cases [of succession issues leading to large losses] and each case is different—making it difficult to draft a universal solution.”

Proposed changes to the definitions, which serve as a template for CDS contracts, will be circulated to ISDA members for consultation before taking effect.

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