This page has been archived and commenting is disabled.


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.


- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Thu, 10/27/2011 - 09:38 | 1816906 SGS
SGS's picture

Ponzi continuum 101.

Thu, 10/27/2011 - 09:42 | 1816926 CClarity
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.

Thu, 10/27/2011 - 11:04 | 1817247 gmrpeabody
gmrpeabody's picture

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

Thu, 10/27/2011 - 11:44 | 1817380 Hard1
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)

Thu, 10/27/2011 - 09:52 | 1816964 MillionDollarBonus_
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 ...

Thu, 10/27/2011 - 10:26 | 1817106 snowball777
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!

Thu, 10/27/2011 - 10:01 | 1816986 jdelano
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... 

Thu, 10/27/2011 - 11:47 | 1817399 piceridu
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.

Thu, 10/27/2011 - 10:01 | 1816998 Solid Gold Bubble
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...

Thu, 10/27/2011 - 09:39 | 1816908 Jim in MN
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.

Thu, 10/27/2011 - 09:39 | 1816910 bigwavedave
bigwavedave's picture


Thu, 10/27/2011 - 09:46 | 1816939 CPL
CPL's picture

+1 for tits.

Thu, 10/27/2011 - 09:39 | 1816911 george
george's picture

one small step for europe one giant step for zero hedge

Thu, 10/27/2011 - 09:40 | 1816913 island
island's picture

Caveat Emptor

Thu, 10/27/2011 - 09:40 | 1816915 pendragon
pendragon's picture

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

Thu, 10/27/2011 - 09:40 | 1816916 SWRichmond
SWRichmond's picture

There are no markets, there are only interventions.

Thu, 10/27/2011 - 09:41 | 1816918 SwingForce
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.

Thu, 10/27/2011 - 09:42 | 1816924 LawsofPhysics
LawsofPhysics's picture

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

Exactly, you are one smart monkey.

Thu, 10/27/2011 - 09:41 | 1816920 DormRoom
DormRoom's picture

Next up  Japanese crisis?

Thu, 10/27/2011 - 09:42 | 1816923 PicassoInActions
PicassoInActions's picture

shorts are getting killed today

tomorrow may not be many of us left.


Thu, 10/27/2011 - 09:43 | 1816929 LawsofPhysics
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.

Thu, 10/27/2011 - 10:05 | 1816976 Chump
Chump's picture

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

Thu, 10/27/2011 - 10:05 | 1817018 SheepDog-One
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?

Thu, 10/27/2011 - 09:42 | 1816927 LongSoupLine
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.

Thu, 10/27/2011 - 13:29 | 1817856 Spigot
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.

Thu, 10/27/2011 - 09:42 | 1816928 ZeroPower
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.

Thu, 10/27/2011 - 09:47 | 1816945 Hansel
Hansel's picture

So then just sell the underlying.  #NotThatHard

Thu, 10/27/2011 - 10:03 | 1817003 machineh
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?

Thu, 10/27/2011 - 10:11 | 1817045 Hansel
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.

Thu, 10/27/2011 - 19:49 | 1819173 unununium
unununium's picture

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

Thu, 10/27/2011 - 09:44 | 1816932 EL INDIO
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.

Thu, 10/27/2011 - 09:46 | 1816940 RobotTrader
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.

Thu, 10/27/2011 - 09:50 | 1816960 kito
kito's picture

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

Thu, 10/27/2011 - 10:07 | 1817028 SheepDog-One
SheepDog-One's picture

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

Thu, 10/27/2011 - 09:54 | 1816975 The Axe
The Axe's picture

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

Thu, 10/27/2011 - 09:55 | 1816982 Chump
Chump's picture

How can you still afford electricity and internet access?

Thu, 10/27/2011 - 10:03 | 1817004 wang (not verified)
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.

Thu, 10/27/2011 - 10:06 | 1817022 tarsubil
tarsubil's picture

I would like the City Shrimp, preeze.

Thu, 10/27/2011 - 10:19 | 1817044 wang (not verified)
wang's picture

ding nei gaw fye

Thu, 10/27/2011 - 10:04 | 1817009 jcaz
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.

Thu, 10/27/2011 - 10:11 | 1817056 disabledvet
disabledvet's picture

How about if it's an "Incredible Plan"? Does that count?

Thu, 10/27/2011 - 09:46 | 1816941 SwingForce
SwingForce's picture

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

Thu, 10/27/2011 - 09:46 | 1816942 vegas
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.

Thu, 10/27/2011 - 09:49 | 1816950 EL INDIO
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.

Thu, 10/27/2011 - 09:49 | 1816955 island
island's picture

I'd be getting a lawyer.

Thu, 10/27/2011 - 09:52 | 1816969 kito
kito's picture

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

Thu, 10/27/2011 - 10:25 | 1817101 Gief Gold Plox
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.

Thu, 10/27/2011 - 09:48 | 1816949 island
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?

Thu, 10/27/2011 - 10:04 | 1817011 azusgm
azusgm's picture

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

Thu, 10/27/2011 - 10:16 | 1817071 disabledvet
disabledvet's picture's just half your debt. I imagine if it was....50.01, THAT MISTER IS A CREDIT EVENT.

Thu, 10/27/2011 - 09:50 | 1816959 Kina
Kina'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.


Making it obvious that they and any other regulators will always change the rules so banks never lose. They are obviously owned just as much as the CFTC is owned by bankers.

Only thing to do is exit the game and let them fuck themselves.

Thu, 10/27/2011 - 09:51 | 1816963 Johnny Lawrence
Johnny Lawrence's picture

So, why are CDS spreads tighter today?

Thu, 10/27/2011 - 09:55 | 1816981 Johnny Lawrence
Johnny Lawrence's picture

I get junked for asking a question?

Thu, 10/27/2011 - 10:02 | 1816999 Chump
Chump's picture

Junk button is pretty much meaningless.

Thu, 10/27/2011 - 09:52 | 1816971 NEOSERF
NEOSERF's picture

This may not have done much but we now live in a world where that doens't really matter.  What was done is that these governments have shown the world they have absolute disregard for law and practice and if they have to declare war on Cyprus so that they get emergency powers to "save the euro" they will do so....

Thu, 10/27/2011 - 09:53 | 1816972 kito
kito's picture

no wonder jim rogers said to get out of finance and into farming.....

Thu, 10/27/2011 - 10:08 | 1817041 SheepDog-One
SheepDog-One's picture

At some point here, everyone will be killed, the longs the shorts, all of em.

Thu, 10/27/2011 - 10:21 | 1817081 disabledvet
disabledvet's picture

I think you're quoting JP Morgan himself on that one. "Gambling, houses of ill-repute, drink. what else do these Americans do?"

Thu, 10/27/2011 - 09:55 | 1816978 abugarance
abugarance's picture

Hearing Graham Summer's crash indicator just triggered again, and again, and again...zzzz...very well correlated with higher highs on the SPX, Copper and Silver

Thu, 10/27/2011 - 09:56 | 1816983 machineh
machineh's picture

From page 2 of 4:

If a creditor is hedging using CDS, and declines to participate in a voluntary restructuring, the the creditor would still hold its original debt claim and its CDS hedge which would continue to protect against future non-payment or a mandatory restructuring.

The ISDA document contrasts a 'voluntary debt exchange' (no Credit Event) and a 'restructuring credit event.' Then they imply that the Greek deal is a 'voluntary restructuring' (yet a third term).

What a mess! As soon as ISDA makes its determination, why would CDS holders not sue in U.S. district court to clarify this tangled mass of weasel-wording??

Thu, 10/27/2011 - 10:07 | 1817035 aleph0
aleph0's picture

ISDA after market close :  Ahem : we've reviewed  this, and now think  ...



Thu, 10/27/2011 - 10:41 | 1817150 silver500
silver500's picture

Could this mean potentialy partial settlement of the CDS?

Thu, 10/27/2011 - 10:00 | 1816990 Everybodys All ...
Everybodys All American's picture

Anyone trading in future CDS contracts must be out of their mind.

Thu, 10/27/2011 - 10:01 | 1816995 jeff314
jeff314's picture

bonga bonga mother fucker....

Thu, 10/27/2011 - 10:02 | 1817001 Belarus
Belarus's picture

Kneejerk reaction over soon. Almost time to load the shorts up to infinity. 

Thu, 10/27/2011 - 10:06 | 1817025 kahunabear
kahunabear's picture

So, let me get this right. Debt is unlimited and it can never default. Cool. Unlimited wealth for all.

Thu, 10/27/2011 - 10:07 | 1817026 kahunabear
kahunabear's picture

Double post, dammit.

Thu, 10/27/2011 - 10:25 | 1817097 disabledvet
disabledvet's picture

good one though. that's why your system of public finance was created by New Englanders and not New Yorkers. Beware "the Bond"

Thu, 10/27/2011 - 10:08 | 1817036 jcaz
jcaz's picture

No biggie for the CDS holders-  they give up the ship for now on this deal, play ball, and hold out until the rest of the Euro paper falls......

Thu, 10/27/2011 - 10:08 | 1817039 NotApplicable
NotApplicable's picture


Thu, 10/27/2011 - 10:11 | 1817050 Note to self
Note to self's picture

I wonder what other contracts will be declared null and void?  Mortgages?  Student Loans?

Thu, 10/27/2011 - 10:37 | 1817146 Chump
Chump's picture

LOL!  Those are for the heathen riff-raff, silly.  Still gotta pay on 'em.

Thu, 10/27/2011 - 10:11 | 1817054 JohnG
JohnG's picture

Modified^2 lol.

Thu, 10/27/2011 - 10:21 | 1817083 Sweetbread
Sweetbread's picture

This is some foocked up $hit. Sorry I have nothing constructive to say. This just makes me mad.

Thu, 10/27/2011 - 10:21 | 1817085 Cole Younger
Cole Younger's picture

If this is not a credit event, why have the likes of moody's, s&p, credit susie, etc. capable of rating anything? Rating agencies are no longer needed when bankruptcy is not treated as a credit event.

Thu, 10/27/2011 - 10:31 | 1817124 gatorengineer
gatorengineer's picture

DId anyone else notice that there supposedly only 3 billion in CDS's on greek debt out there????  HUH?  I thought that there was at least as much insurance out there as DEBT?  All of these bond holders have been uncovered?  Someone please explain.....

Thu, 10/27/2011 - 10:42 | 1817168 A Man without Q...
A Man without Qualities's picture

Banks made a fortune selling structured notes to Greek pension funds (lots of bribes to trade union leaders, lots of money for Greek brokers).  Reference credit Hellenic Republic, but it is a CDS based instrument.  So, the desperate attempt to prevent credit event is linked to everyones desire to keep the bonds paying - a credit event could well mean almost 100% loss owing to structure of the note.

Here's one example, but the market was far bigger than just this €280mm deal...

Thu, 10/27/2011 - 11:16 | 1817282 DonutBoy
DonutBoy's picture

I think you're all jumping the gun a bit.  There's been no haircut - all we have is a press conference.  No one has gone to the mat yet.  No one has volunteered their bonds to be given new ones at 50% face value.

If you owned the bonds and you bought CDS's to insure your portfolio, would you turn in your bonds under a deal that does not trigger your own CDS protection?  No, you'll wait.  The CDS sellers will be bailed out by taxpayers, the CDS holders will be covered.  That's what we learned 2008.

Thu, 10/27/2011 - 11:26 | 1817326 LawsofPhysics
LawsofPhysics's picture

Yes, and how did that turn out for equities and PMs again?

Thu, 10/27/2011 - 11:49 | 1817403 Todd Horlbeck
Todd Horlbeck's picture

My first thought was that if they don't honor CDS contracts for the very thing they are supose to protect against, wouldn't this lessen the demand for both the CDS and the bonds if you can't hedge?


Thu, 10/27/2011 - 11:54 | 1817429 Mediocritas
Mediocritas's picture

The ISDA has to be one of the most blatantly obvious examples of corruption in the world at this moment. Thing is, they're damned and don't even know it. Protecting the BNP Paribas and Deutsche Banks of this world by refusing to call a credit event a credit event may well save those banks a mighty headache, but by doing so, a whole lot of hedges suddenly blow up as positions that depended on CDS triggering turn out to be not hedged at all. The subsequent cascading panic attack will, sure as the Pope's a paedophile, turn around to bite the ass of the very same banks that a corrupted ISDA thought it was protecting.

Best thing to do here is stop playing hide the bomb and just let it explode. Some survivors will remain. Let them salvage whatever is left and we can move on.

Thu, 10/27/2011 - 13:22 | 1817831 Spigot
Spigot's picture

I can pretty much garran-damn-ty you that a ruling such as this will completely destroy the use of CDS *AND* sweep all risk premiums BACK into the interest rate required. (IE - interest rates will rise my friends) and all derivatives holders will be reviewing their contracts to see if their triggers reference ISDA as the ruling body for an event...because IF THEY FIND THAT, then they will terminate dealings in that garbage immediately (IE expect total derivatives markets to begin a grand bubble deflation collapse).

Do NOT follow this link or you will be banned from the site!