On Friday March 9, 2012 the 15-member Europe, Middle East and Africa Credit Derivatives Determinations Committee ("EMEA DC") of the International Swaps and Derivatives Association, Inc. ("ISDA") determined unanimously that a Restructuring Credit Event had occurred with respect to The Hellenic Republic ("Greece"), under Section 4.7(a) of the 2003 Credit Derivatives Definitions as supplemented by the July 2009 Supplement to the 2003 ISDA Credit Derivatives Definitions, each as published by ISDA. The EMEA DC released a statement to that effect on the same day (available at isda.org).
The EMEA DC made the decision following submission to it by a market participant of a question as to whether the exercise by Greece of collective action clauses ("CACs") in Greek law governed bonds issued by Greece (the "Affected Bonds) constituted a Restructuring Credit Event. Standard credit default swaps written in respect of European sovereign debt include "Restructuring" as a Credit Event. According to the underlying contractual terms of a credit default swap, if a Credit Event occurs in respect of the debt in relation to which protection was purchased, the credit protection seller must make a payment to the credit protection seller.
On February 23, 2012, the Greek parliament voted to amend the terms of the Affected Bonds by inserting CACs, the terms of which allowed Greece to impose a restructuring plan on all holders of the Affected Bonds, so long as the restructuring was taken up by the holders of at least two-thirds of the aggregate face amount of the Affected Bonds. The restructuring deal that holders of the Affected Bonds were offered by the Greek government took the form of a debt exchange which would see bondholders receive new 30-year Greek bonds with a face value of 31.5% of the face amount of the exchanged debt, plus a two-year debt security issued by the Luxembourg-based European Financial Stability Facility with a face value of 15% of the exchanged debt. In addition, holders would receive a detachable security with a payout linked to Greece's gross domestic product and a notional amount equal to the face value of the new bonds. Holders of aapproximately 85% of the aggregate face amount of the Affected Bonds signed up to the restructuring by the deadline; this was in excess of the two thirds threshold that was required to permit the Greece to exercise the CACs and therefore force the remainder of the holders of the Affected Bonds to participate. Although the debt exchange had been under negotiation for several weeks, it was the act by Greece of exercising the CACs that actually triggered the Restructuring Credit Event that will lead to pay outs by those who sold protection under credit default swaps referencing Greek sovereign debt. This is because the exercising of the CACs effectively ensured that the restructuring was binding on all holders of the Affected Bonds, a requirement for a Restructuring Credit Event.
The EMEA DC had previously determined (unanimously) on March 1, 2012, that a Restructuring Credit Event had not occurred in respect of two earlier questions that were submitted to it in relation to the Greek bailout. The first question concerned whether holders of the Affected Bonds were subordinated to the European Central Bank and certain Eurozone national central banks after they agreed to exchange their holdings of approximately EUR 50 billion of existing Greek bonds for identical new Greek bonds but on terms that would ensure their exclusion from the aforementioned debt exchange. The second question concerned whether there had been any agreements between holders of private Greek debt and Greece which would constitute a Restructuring Credit Event.
Whether payouts under credit default swaps written on Greece would be triggered has been closely followed by the market for months and had become highly politicized. Last year, European policy makers proposed a "voluntary" debt exchange (on different terms to those described above) for Greece which may not have triggered a Restructuring Credit Event and therefore would not have resulted in payments to those that bought credit protection on Greece in the form of a credit default swap. This may have been the case because, as mentioned above, only a restructuring that is binding on all holders of the relevant obligation (which may not have been the case under the terms of a "voluntary" restructuring) triggers a Restructuring Credit Event. There were claims among market participants that any deal structured as "voluntary" for the purposes of the Restructuring Credit Event to avoid triggering pay outs under credit default swaps referencing Greek sovereign debt, would undermine the integrity of the instrument
Following its determination that a Restructuring Credit Event had occurred, the EMEA DC unanimously determined to hold an auction in respect of certain outstanding credit default swaps on Greek sovereign deb. The auction will take place on March 19, 2012. A list of deliverable obligations and other information with respect to the auction is available onISDA's website (see isda.org).
The auction will determine the price at which these credit default swaps will pay out. Current estimates suggest that the total net exposure of sellers of credit protection on Greek sovereign debt is approximately US$ 3.2 billion. The amount that will be paid out following the auction will be a percentage of that number as the final payment under a credit default swap is the par value of the relevant deliverable obligations, minus the recovery value (expressed as a percentage of par) of such deliverable obligations. During the auction, market participants will submit tradable bids and offers on the deliverable obligations to determine their recovery value.
There is some concern in the market that there will be an insufficient quantity of deliverable obligations following the debt exchange to trade at the auction, potentially skewing the determination of a final price.
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