ISDA Says No CDS Trigger On Subordination

Tyler Durden's picture

And just as ISDA was starting to become somewhat credible again, we get this from Bloomberg:

  • Spanish CDS Trigger Unlikely on Subordination, Says ISDA *Dow Jones

So..... Subordination? Thank you ISDA for confirming that the true reason of today's sell off has now been enacted.

From Reuters:

Credit default swaps on Spain are unlikely to trigger as a result of the 100 billion euro bail-out of the country's banking system announced over the weekend, according to leading derivatives lawyers.


The European Stability Mechanism's senior creditor status has led to questions over whether a subordination credit event will be triggered upon Spain receiving loans from the permanent bailout fund. In contrast to the IMF's preferred creditor status, which is implicit rather than legally documented, the ESM's treaty actually specifies its seniority to other creditors - a clause that some analysts reckon could trigger CDS.


There have been subsequent reports that Spain's emergency loans may be funneled through the temporary bailout fund, the EFSF, before the ESM becomes into force in July to avoid a potential credit event. Such measures may prove unnecessary, though, as derivatives lawyers have cast doubt on the possibility of ESM rescue money triggering CDS.


"I can't see any basis on which this would constitute a subordination credit event as it doesn't change the terms of the claims held by the other creditors," said Simon Firth, a partner in the derivatives practice at Linklaters.


"It's actually impossible to have a restructuring credit event based subordination without something that affects the rights of existing bondholders. In the absence of some kind of agreement or change of law, then I don't see anything that will [do that]," said Firth.


The definition of subordination has two parts, neither of which would apply to the ESM loans, according to Firth. The first pertains to companies in liquidation, which does not apply to sovereign CDS as countries cannot enter insolvency proceedings.


The second states that existing bondholders won't be entitled to receive or retain payments with respect to their claim while the reference entity (Spain) is in default in respect of its senior obligations (in this case the ESM loans).


"There won't be anything that affects the entitlements of the existing bondholders to receive or retain payments," said Firth. "Their entitlement is exactly the same - all you have is an obligation between the sovereign and some other creditors to pay off those creditors first. That is not binding on the bondholders."

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hedgeless_horseman's picture



And just as ISDA was starting to become somewhat credible again...

Really?  ISDA and credible in the same sentence?  Don't you mean conflicted?

FL_Conservative's picture

You mean, subordinacion no es Uganda.

GOSPLAN HERO's picture

Obama was born in Uganda not Kenya.

magpie's picture

At some point the ECB will be bound to accept BCs als collateral.

ToNYC's picture

Like the old Johhny Carson skit with Ed McMahon that went., "Ubangi? Ubetcha!"

We're done; it's 12 hours after the iceberg.

jus_lite_reading's picture


WHAT A SHAM!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

resurger's picture

Lite, lets start a CDS index and register it with ISDA

We know that the triggers will never ever ever be triggered.

How about we start with 5,000,000,000,000 and and 2big2fail #plates, and if they ever do, fuck it! The government will just fucking print.


disabledvet's picture

NO! the Government will CONVINCE..."then determine whether and WHAT to print." SAYING SOMETHING comes first. "then an action"...provided any action is required of course.

resurger's picture

Many say we are at a cross roads, and either way its all good for Gold Disabldvet.

Chose from the following:

1- Financial "Reset"

2- Print to Infinity

Now we are exactly in the middle of teh 2

smlbizman's picture

i imagine the isda as the bad guy referee in the fans are screaming at him for not seeing the foriegn object, but he says fuck you i am calling this match.....

SemperFord's picture

Why would the ISDA ever have been thought of as credible in the first place???

CClarity's picture

They aren't thought of as credible.  They're simply built into the "system" - more of the self-policing that only works for the big guns.  Those who write the CDS decide what triggers events that might cost them if they had to pay out after collecting all those fees.  What a system!!!  The Trillions of $ nearing a Quadrillion of derivatives for protection and hedging - - - against what?  Reality?  Most of the hedges won't be worth the paper they're printed on if they actually have to be played out.  

JR's picture

+ 1

This is the sound of panic from the banks. They are losing their control; they’ve let too many criminals under the tent.

They thought they had control, and they don’t; they thought they could make it all work, and they can’t.

francis_sawyer's picture

We already know where the 'trigger' is...

Whoa Dammit's picture

Trigger is stuffed and is at the RFD-TV Roy Rogers museum. ;-).

Temporalist's picture

That just makes me want to say "Hi ho Silver!" (hi yo too)

Dick Darlington's picture

Spanish bonds marinated in subordination? Does the price include insolvency salad on the side? Thanks but no thanks.


So sovereign CDS trades because...?

RoadKill's picture

CDS will be triggered, just not by this. Do you have a prospectus for a specific issue of Spanish debt (specific CUSIP) that says subordination at this level is a default? Unlikely.

CDS was triggered and paid on Greece. Paitence young Padawan.

From the outside something that might seem to trigger CDS depends on the specific covenants of the specific issue (CUSIP) that a specific CDS is written on. This game is for those that read 500+ pages of legalease on EACH issue and know what is good (UK law bonds) and what isnt.

If it was easy to make $$ on this the return profile would look like a short equity ETF rather then letting you turn a few million into billions.

Seize Mars's picture

What a shit show.

Why even bother trading credit? It doesn't work! It CAN'T pay off!

junkyardjack's picture

TPTB know that if any event ever triggered a CDS event then all of the banks would be immediately bankrupt because none of them expect to ever have to pay.  There will never be a major CDS trigger event because it would collapse the whole system.

bigkahuna's picture



However, there will be such an event TO collapse the system.

Rongen's picture

Surely this is bullish for Spanish bonds.

gojam's picture

As I recall, it didn't have that consequence in the past.

As the 'insurance' was no longer credible it pushed sovereign bond yields up. (but I'm sure someone will correct me if I'm wrong)

Oh, and don't call me Shirley!  :-)

chinaguy's picture

Well, seriously, Greece was annoying, but Spain? That would hurt big time.

mayhem_korner's picture



You sound like Bwanee Fwank reading up on a new "technique"...

Jethro's picture

As long as he has Timmy Geithner as his cabin boy, I'm OK with it.  I don't want to know about it, but I'm OK with it.

lemonobrien's picture

what's the use of buying a CDS when they're never triggered cause it's a rigged game?

Conman's picture

Isnt the real question why buy the bonds if you can hedge against them imploding?

UP Forester's picture

It's a zero-sum game.

If you're not a TBTF bank, you end up with zero.

Sudden Debt's picture

Why by 100 year bonds when you know the system is imploding?
Why even buy a 10yr?

El Oregonian's picture

At this rate a 3 MO. sounds incredibly risky... and very stupid at this point.

disabledvet's picture

yet all it creates is "an inversion" yes? "so then what"? my money is on "someone says the word recession." and of course "this is true." interestingly though "he claims a mild one"...meaning "recession." which is why i ask "and then what?" in other words "once you get you...ahem..."mild" recession then what?" and now we know. NOTHING!

kridkrid's picture

You may be very smart... or you may be very high... or both... or neither.

icanhasbailout's picture

because you can then represent the net hedged position as "risk-free capital" and count it as part of your bank's Tier 1 capital ratio

kridkrid's picture

Nice racket.  Let me see if I have this right.... I'm TBTF bank... I borrow digital money from the fed... I buy sovereign debt.  I then "hedge my risk" through acquirig insurance in the form of a CDS.  I can then loan money against that hedged position levered up 10x's (or higher)?  Something like that?  Is that the whole picture?

disabledvet's picture

"until you can't." or "what the market will bear." in short "no credibility means no credibility"...even if all you offer is "incredibility." indeed "especially if you offer incredibility." what's that line about "not suffering fools" again?

clones2's picture

Let me check my Finance 101 book from Yale SOM...........    Yep - you got it.

kridkrid's picture

I'm not always super smart, so let me extend my question even further... I'm still a TBTF: Is the same true of other forms of debt?  If I were to buy some sort of CDO... say some collection of MBS... if I hedge that through a CDS, does that also now represent Tier 1 capital against which I can loan at 10x's (or something like that)?

RoadKill's picture

BTW something only 1% of ZHers understand is that CDS is collateralized. The buyer pays a fee periodically, not for an empty promise, but for a claim on a collateralized account. At the end of every day the issuer of CDS has to add collateral to the esgrow account based on price movements in the specific issue.

This is why a "trigger" isnt a catostophic event. As the value of the CDS rises the esgrow account is funded. Its a rapid rise in value of CDS that is a capital drain on issuers. The trigger is uneventful because 99% of proceeds are in esgrow the day before the trigger.

Village Smithy's picture

What makes you sure that the esgrow accounts are actually fully funded?

Terminus C's picture

That would be true, but you suffer from a false assumption... that they play by the rules.

SheepDog-One's picture

AH yes I see....its all 'backed by collateral'....lmao

sschu's picture

Is it possible this collateral has been pledged multiple times or is posted based upon un-real value?

Who is responsible for making sure the rules are really followed and do you have any faith in the financial institutions or the regulators tasked with overseeing the institutions?

This is the real problem, no one trusts anyone, so your collateralized CDS could be just a bunch of false promises.


Temporalist's picture

Something is "esgrow"ing and it's the pile of bullshit people are willing to suffer.

junkyardjack's picture

So there is $25 trillion of collateral in escrow?  Not likely.  Its more like there is enough funds put in escrow that if the counterparty goes bankrupt you can go out into the market and buy another CDS instrument, of course when everything collapses at once the collateral isn't enough to buy at the market without major losses.  No one is holding in escrow the amount related to if a CDS event is triggered, that would be a ridiculous waste of capital.

insanelysane's picture

BTW something the 99% of ZHers understand is that it is an ESCROW account and that doesn't mean that that there is anything in there.  MFG clients had actual accounts with balances and they were vaporized.

withnmeans's picture

Look at it this way, its like CDS Kiting !!! A revolving door ! Covering a check with another check with another check, and so on... There is no MONEY !

Bansters-in-my- feces's picture


Hurry up and live up to your user name.