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Response To 4-18-2018 General Interest Question
Response To 4-18-2018 General Interest Question
Response To 4-18-2018 General Interest Question
The General Interest Question also imposes an inappropriate burden on the DC.
For the DC to determine if specific Obligations would produce a “low” Auction Final Price, the DC
would be required to form a view as to the relative expected recovery values of the Reference
Entity’s outstanding obligations. The DC would become the arbiter of value, guess at the course
and result of an impending Auction, and thereby preempt and directly undercut the very
purpose of the Auction— to determine the expected recovery value of the Reference Entity’s
cheapest-to-deliver Deliverable Obligation in a transparent, market driven process. The
established highly transparent and tested Auction process enables market participants to settle
CDS positions efficiently based on a market-wide price following a Credit Event, and contributes
significantly to the functioning of the CDS market.
1
Capitalized terms used but not defined herein use the meanings given to them in the DC Rules or the
2014 ISDA Credit Derivatives Definitions, as applicable.
Obligations retroactively may be excluded from an Auction despite the fact that they otherwise
squarely fit within the standard Deliverable Obligation Characteristics. Adopting the premise put
forth in the April 18 General Interest Question would fundamentally alter the accepted Auction
price-finding model from an ISDA DC supervised transparent process with pre-defined rules
allowing the market to determine value, to a one where the DC makes initial value
determinations on an ad hoc basis, limiting the role of the market. If such a fundamental
change were advisable, which it is not, it should only be considered by ISDA through an ISDA
Board supervised process, and not by means of the answer to a general interest question.
Last week, on April 11, 2018, the ISDA Board issued a statement to reiterate the
importance for the CDS market that a DC base its determinations on objective information only:
“The credit event determination process does not allow the DC to make
subjective decisions, or to consider the intent or good faith of the parties that
put in place the arrangements leading to a potential credit event. This ensures
the process is objective and predictable, and decisions can be made quickly.”2
The determination of the Auction terms once a Credit Event determination has
been made is equally important and must apply the same rationale. Market participants desire
objective, predictable and speedy determinations with respect to Credit Events and the
settlement of CDS. A departure from the established and tested approach would be detrimental
to the functioning of the markets, chill market participants’ confidence to transact in CDS and
would be inconsistent with the stated objectives of the ISDA CDS Auction process.
* * *
2
See ISDA Board Statement on Narrowly Tailored Credit Events, April 11, 2018, available at:
https://www.isda.org/2018/04/11/isda-board-statement-on-narrowly-tailored-credit-events/.