The ISDA Board of Directors responded to news reports of certain arrangements entered into between buyers of credit default swap ("CDS") protection and corporations. The reported arrangements are designed to increase payments to the CDS buyer upon the occurrence of "narrowly tailored credit events" while minimizing the impact on the corporation.
In a statement, ISDA expressed concern that these arrangements do not reflect the creditworthiness of the underlying corporate borrower and, therefore, could "negatively impact the efficiency, reliability and fairness of the overall CDS market." ISDA acknowledged that these narrowly tailored credit events may fall within its standard definition of a credit event for settling CDS. Given the narrow basis on which ISDA's Determinations Committees must base their decision, ISDA is seeking market input on whether changes should be made to its standard CDS definitions.
Commentary /Lary Stromfeld
These facts present an existential challenge to the single-name CDS market. On the one hand, the process for determining whether a credit event has occurred must be objective and predictable. On the other hand, if certain facts may not be considered in that determination, the result may be inequitable. The solution must fall on the side of fairness. A market cannot function where parties are required to perform contractual obligations triggered by inappropriate behavior.
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