What ISDA Matter?

Yesterday, the Senior Supervisors Group, composed of national banking regulators from seven countries, released a report titled Observations on Management of Recent Credit Default Swap Credit Events. Although the report is short, it is very tough sledding.

The Senior Supervisors Group examined the process for unwinding a credit default swap when something bad happens. They found that the process works pretty well, but they didn't like that it is ad hoc instead of part of a standard contract.

Standard agreements governing credit default swaps are drawn up by an industry body called the International Swaps and Derivatives Association, Inc (ISDA). Under ISDA's 2003 Credit Derivatives Definitions, when a CDS experiences a "credit event" it terminates and is settled via an auction. There are six credit events, and all of Article IV of the 2003 Credit Derivatives Definitions is devoted to explicating them.

The process of incorporating the auction process into the 2003 Definitions has acquired the unusual name "hard wiring." ISDA has published a hard wiring timetable and a central list of developments.