By all that is right and fair a CDS on a Greek Bond should have to pay out in this case of a 53.5% haircut.
Whomever was writing this insurance should have to pay out. What I'm not sure about is why the Euro's are trying so hard to stop this payout.
Swaps Body to Review Greece's Debt Revamp
By KATY BURNE
A special committee of the International Swaps and Derivatives Association has agreed to review recent developments in Greece's debt restructuring as a potential "credit event" that might trigger $3.2 billion of credit-default swaps on Greece for payouts.
The move may result in the country being officially declared in breach of its obligations to bondholders somewhat sooner than expected—even though Greece hasn't failed to honor payments and its restructuring deal with private creditors isn't complete.
ISDA said in a statement Tuesday that, as secretary to the so-called Determinations Committee that decides such matters for the CDS market, the committee will hold a meeting at Thursday to determine whether to require payers of CDS protection on Greek sovereign bonds to compensate buyers.
An anonymous party asked the committee to consider whether moves that could force private investors to forgive 53.5% of the face value of Greek debt, while the European Central Bank got a better deal, constitutes mandatory subordination that should allow holders of CDS to collect compensation.
The ECB and national central banks "benefited from a change in the priority of payments as a result of [Greece] exclusively offering them the ability to exchange out of their eligible instruments prior to the [private creditor] exchange and [expected] implementation of" the collective-action clauses, the request read.
Under the 2003 Credit Derivatives definitions published by ISDA, a change in the payment priority ranking of any obligation, causing its subordination, is one of the events in restructuring that can trigger CDS contracts for payouts—as long as it results from a deterioration in credit-worthiness.
In the event CDS contracts are triggered for payouts, $3.2 billion is the maximum amount that could change hands between sellers and buyers. If CDS contracts are triggered, buyers receive the face value of their debt, less the recovery value assigned to the affected bonds.
The decision makers' identities and their credentials are a closely guarded secret of the firms those individuals represent and of ISDA, a trade body for swaps that convenes a 15-member committee every time such a determination is requested of it.
ISDA's Determinations Committee for Europe comprises 10 voting dealer banks and five major investment firms named by ISDA. A supermajority of 12 must agree for a decision to be binding on CDS contract held by parties that have signed up to be bound by ISDA protocols.
The dealer firms constitute some of the largest investment banks in the world, and one committee member represents each. They are Bank of America Corp.'s Bank of America Merrill Lynch, Barclays PLC's Barclays Capital, BNP Paribas, Credit Suisse Group AG, Deutsche Bank AG, Goldman Sachs Group Inc., J.P. Morgan Chase & Co., Morgan Stanley, Société Générale SA and UBS AG. Meanwhile, the investment firms are similarly influential: BlueMountain Capital, Citadel, D.E. Shaw, Elliott Management Corp. and Pacific Investment Management Co.
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