Tyler Durden's picture

For those who have not been following, ISDA has released their updated Q&A on whether a 'voluntary' gun-to-my-head haircut of 50% is not a credit event. Nothing really new here but it clarifies much of what we have said with regard to their 'determinations' process and how they will defend their decision against a lot of very upset basis traders (who by the way were most supportive of both new issues and secondaries in the European sovereign market  - well until now that is).

Update on Greek Q and a 27 10 11

and more detailed perspective from Peter Tchir of TF Market Advisors:

We have been saying and continue to say that being short sovereigns via CDS is a bad idea.  The governments are trying to structure deals specifically to avoid triggering CDS.  Banks that have been using CDS to hedge will want to reduce their CDS shorts - because the banks that are hedging do it for economic reasons, not just for regulatory capital reasons.

I don't see any way that this is a Credit Event.  At this stage, the IIF still has to draft a proposal and sent it to its members who can accept or reject it.  In the end it doesn't matter whether they are forced to agree to a restructuring or not. That isn't what is meant or picked up by "voluntary" in the ISDA definitions.  The definition is meant to pick up the case where someone votes No to a change, but because enough other people vote in favor, that their bonds also get converted (say a 95% vote is required, and 96% is reached, then the bond converts, and the voluntary is meant to protect the 4% who didn't vote in favor but are forced to convert anyways).  We keep looking at the definition and don't think there is a strong case to say this was a Credit Event.

You also have the issue that under SNAC trades, you agree to be bound by the Credit Event Determination Committee.  So not only would you need to fight whether or not the Committee was correct, you would probably have to win an argument that you weren't bound to their decision even if they were incorrect.  In the old days, you would claim a Credit Event occurred, and send your Credit Event Notices to whoever had sold you protection.  If they disagreed, then you could sue them.  I am told the fact that you have agreed to be bound by the decisions of the Credit Event Determination Committee makes it harder than ever to suit.

Obviously these things can be challenged (and someone may well challenge them), but I don't think it is a particularly strong case.  In any event, doesn't seem like an exchange will occur before the Dec 20th contract rolls off.

At some point, someone might say something that could trigger a Repudiation/Moratorium extension.  I think it would have to be someone from Greece, and they have been very careful about saying anything potentially negative.  I'm not sure that Juncker would count as a "Governmental Authority" but some of his tough talk seemed to be getting dangerously close to language that could be construed as such, but all that would really do is extend the maturity on CDS contracts, it would not trigger payments which would still require a Failure to Pay.

Just to make it more interesting, the EFSF may be able to sell sovereign CDS.  More pain for shorts, and if you think they manipulated the situation enough when it wasn't their money, wait until you see what governments do, when it is their own money at stake if there is a Credit Event.

I don't believe that this "solution" has done that much and too many people are looking at sovereign CDS as a sign.  I think as the news is digested, real details come out, Sovereign CDS will continue to gap tighter, bonds of Germany and France will continue to be weak, Italian and Spanish bonds will give up some of their gains, and CDS in MAIN and XOVER and IG will drift wider in response to moves in bonds rather than moves in sovereign CDS.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
SGS's picture

Ponzi continuum 101.

CClarity's picture

Maybe Europe will grant Madoff asylum as a political refugee, on basis that he was only doing God's work and shouldn't be locked up for doing what is business as usual by the goverments and accounting practices overseers.

gmrpeabody's picture

So, since my neighbor willingly only let half his house burn down, my insurance won't pay?

Hard1's picture
Q: Would this call into question the utility of CDS as a hedging tool?  A: NO!!! LOL!!!!!   ROFL!!!! (You'll laugh at this unlesss you were hedging your Greece portfolio and you lost on the portfolio, gained nothing on the CDS and still have to pay 4 years of premiums)

MillionDollarBonus_'s picture

This teaches traders for hedging in the completely discredited CDS market. The doomer CDS market has been incorrectly indicating BOA and Morgan Stanley defaults for some time now. So where are the defaults? I'm still waiting ...

snowball777's picture

1) mark to market

2) fireworks (pun intended)

3) (another) bailout or get lehman'd

If derivatives are so cool by them, why the need to shift their liabilities in that space into FDIC land?

Bears are gonna "clawback" your $1M bonus!

jdelano's picture

You've lost me here.  If there's no chance that this is a credit event, then sovereign CDS are toilet paper and CDS market is officially dead.  Why would anyone buy insurance that has proven to be completely worthless?  Would seem to me the yields on PIIS bonds are going to blow out... 

piceridu's picture

I have found that this answer fits with any question or frustration: Note, plug in any question or scenario...CDS, Wallstreet Bankers, will work with any confusion or proposition regarding the Keynesian paradigm.

Solid Gold Bubble's picture

So the PTB get the S&P up to 1270 and save the banks without QE3 by strongarming the necessary officials. Can't they just carry this on forever? If they can do this, imagine what they could do to the price of silver? Oh, wait...

Jim in MN's picture

What part of 'if the big banks on The Committee got laid last night your CDS might be worth something' don't folks understand? 

Just discount everything on Earth 50% and maybe it will make more sense.  From a market as opposed to mafioso standpoint.

george's picture

one small step for europe one giant step for zero hedge

pendragon's picture

safe, efficient markets. really? got to be a joke

SWRichmond's picture

There are no markets, there are only interventions.

SwingForce's picture

If you believe what the Euro PTB just did will work, I've got a bridge to sell you.

If the haircuts are voluntary, I would rescind my agreement if I was a Greek pension.

LawsofPhysics's picture

" I would rescind my agreement if I was a Greek pension"

Exactly, you are one smart monkey.

DormRoom's picture

Next up  Japanese crisis?

PicassoInActions's picture

shorts are getting killed today

tomorrow may not be many of us left.


LawsofPhysics's picture

That is the plan.  Now that CDS have become a place for money to die, look for some massive sovereign unwinds and contract lawyers to spring into action.

Chump's picture

Yup, so goodbye short-covering rallies and hello no-bid flash crash.  I'm glad our distinguished leaders are so smurt.

SheepDog-One's picture

They sure as hell must be running out of Charlie Brown shorts to kornhole to raise world markets. At some point here, theyll all give up shorting and THEN what?

LongSoupLine's picture

Holy Shit...Bob Pisani just had a coming to Jesus and is spewing out common sense and truth as fast as he can.

Never thought I'd hear it.

Spigot's picture

Hope he doesn't have an aneurysm. But its funny that once his friends have their security blanket taken away from them (a Linus moment) they completely lose it.

As I wrote further down, this is the end of derivatives as we know them and the beginning of "The Great Interest Rate Reloading" where interest rates rise to compensate for default and other such risks, which risk premiums where shifted to these derivates contracts, but now MUST be reloaded onto the interest rate required as its got to be paid for by someone, and now (again) it will be the borrower directly.

Boy, this is going to be fun and aweful to watch.

ZeroPower's picture

A disgusting day for all professionals working in the credit and sov bond space. 

Hey look mr. Risk dept, no more need for any hedges, SINCE THEY WONT FUCKING PAY OUT.

Hansel's picture

So then just sell the underlying.  #NotThatHard

machineh's picture

Typical insurance company 'that don't count' weaseling:

Your house was destroyed by an Act of God? That don't count!

Your house was ruined by a flood? That don't count!

You had a building code violation when your house burned down? That don't count!

So why the f*ck did I buy insurance?

Hansel's picture

But CDS has never been insurance.  If it was it would be highly regulated and issuers would have to hold reserves against it.  This was always a toxic security. 

I have no sympathy for people whining "I bought Greek debt even though I knew they were bankrupt because I also bought CDS so I could make a couple extra percent..."

Bring on the junks.

unununium's picture

Why am I thinking that the hedgies probably bought Greek debt and SOLD the CDS...

EL INDIO's picture

LMAO “… a 'voluntary' gun-to-my-head haircut of 50% is not a credit event.”

If it’s not a credit event it’s definitely a scalping event.

RobotTrader's picture

It was pretty much a dead lock that they would cobble together a solution.

What matters is not whether it is a credible plan or not.

The only thing that matters is how the market reacts to it.

You could see this coming a mile away, since we had 41 consecutive days of -1000 TICK readings, with many over -1250 and two over -1400.

Clean breakaway gap right over the 200-day on the NY Composite.

kito's picture

no robo, in your case, you saw that it came a mile away. 

SheepDog-One's picture

Robo saw it coming from his position of rearview mirror trading, well after the fact as usual.

The Axe's picture

At least the market stocks like exxon, boeing, intel  up    gmcr,nflx,open,   down over the last 3 weeks.... 

Chump's picture

How can you still afford electricity and internet access?

wang's picture

Hey Robo  whilst you were getting serviced last night many of your detractors also appear to have been getting serviced (though in the latter case straight up the ass with a wire brush) I wonder how many of them are able to sit at their computer long enough to junk you.

tarsubil's picture

I would like the City Shrimp, preeze.

wang's picture
wang (not verified) tarsubil Oct 27, 2011 9:19 AM

ding nei gaw fye

jcaz's picture

Hey, you're almost whole on Netflix now, huh?

Seriously, I've been in the Securities industry for 24 years, and I've never seen anyone as clueless as you are.

Is this your 8th grade Civics assignment?   Who the fuck watches the TICK anymore?

Your conclusions are- without fail- meaningless and obtuse.   One can literally take your observations and apply them to any market event, and come to a conclusion that prices always will rise the next day.

Please stop citing technical trading- technical trading is, by definition, agnostic, and you're clearly a perma-bull, which renders the charts meaningless for you.

Charts don't make you sound intelligent, and don't reinforce your undying belief that all stocks must go straight up every day.

And Netflix will never see $100 again in our lifetimes- deal with it.

SwingForce's picture

Pretty slick, if the 15 members if ISDA don't take haircuts, then its NOT a credit event. Screw Barclays.

vegas's picture

ISDA has proven themselves to be nothing short of a bunch of modern day thieves; on a par with the scumbags who populate the CME in Chicago.

If I was a CDS trader, I'd be looking for a new market to trade. How many times do you need to be bent over the proverbial fencepost and fucked with no kisses, and be told wasn't that great?

Despite the bullshit of no credit event, everybody knows the truth. Remember, if their lips move they are lying.

EL INDIO's picture

"...If I was a CDS trader, I'd be looking for a new market to trade..."


You mean find another job.

island's picture

I'd be getting a lawyer.

kito's picture

somebody please crush the International Socialist Derivatives Association with a massive class action lawsuit!!!!! please!!!!!  

Gief Gold Plox's picture

While I agree with your call to action, but did you see the names behind ISDA? You'd have to be God himself to stand a chance.

island's picture

"The Restructuring Credit Event is triggered if one of a defined list of events occurs, withrespect to a debt obligation such as a bond or a loan, as a result of a decline increditworthiness or financial condition of the reference entity. The listed events are: reductionin the rate of interest or amount of principal payable (which would
include a “haircut”);
deferral of payment of interest or principal (which would include an extension of maturity of
an outstanding obligation); subordination of the obligation; and change in the currency of payment to a currency that is not legal tender in a G7 country or a AAA-rated OECD country. The decline in creditworthiness or financial condition requirement is intended to filter out restructurings that occur as a result of improved financial condition."


SO what makes this a situation where a CREDIT EVENT is NOT TRIGGERED?

azusgm's picture

It's a voluntary re-fi agreement. <sarc>

disabledvet's picture's just half your debt. I imagine if it was....50.01, THAT MISTER IS A CREDIT EVENT.