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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Mon, 06/11/2012 - 14:06 | 2515424 hedgeless_horseman
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And just as ISDA was starting to become somewhat credible again...

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

Mon, 06/11/2012 - 14:07 | 2515439 Atlas_shrugging
Atlas_shrugging's picture

subordinacion no es subordinacion

Mon, 06/11/2012 - 14:16 | 2515473 FL_Conservative
FL_Conservative's picture

You mean, subordinacion no es Uganda.

Mon, 06/11/2012 - 15:06 | 2515651 GOSPLAN HERO
GOSPLAN HERO's picture

Obama was born in Uganda not Kenya.

Mon, 06/11/2012 - 15:46 | 2515789 magpie
magpie's picture

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

Mon, 06/11/2012 - 16:25 | 2515910 ToNYC
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.

Mon, 06/11/2012 - 14:17 | 2515480 jus_lite_reading
jus_lite_reading's picture


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

Mon, 06/11/2012 - 14:30 | 2515532 resurger
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.


Mon, 06/11/2012 - 15:02 | 2515631 disabledvet
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.

Mon, 06/11/2012 - 15:22 | 2515702 resurger
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

Mon, 06/11/2012 - 14:44 | 2515579 smlbizman
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.....

Mon, 06/11/2012 - 14:05 | 2515427 SemperFord
SemperFord's picture

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

Mon, 06/11/2012 - 14:15 | 2515470 CClarity
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.  

Mon, 06/11/2012 - 14:29 | 2515524 JR
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.

Mon, 06/11/2012 - 14:05 | 2515430 francis_sawyer
francis_sawyer's picture

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

Mon, 06/11/2012 - 14:20 | 2515491 Whoa Dammit
Whoa Dammit's picture

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

Mon, 06/11/2012 - 14:52 | 2515597 Temporalist
Temporalist's picture

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

Mon, 06/11/2012 - 14:06 | 2515433 Dick Darlington
Dick Darlington's picture

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

Mon, 06/11/2012 - 14:06 | 2515434 NERVEAGENTVX

So sovereign CDS trades because...?

Mon, 06/11/2012 - 14:16 | 2515472 RoadKill
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.

Mon, 06/11/2012 - 14:07 | 2515436 Seize Mars
Seize Mars's picture

What a shit show.

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

Mon, 06/11/2012 - 14:19 | 2515488 junkyardjack
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.

Mon, 06/11/2012 - 14:31 | 2515529 bigkahuna
bigkahuna's picture



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

Mon, 06/11/2012 - 14:07 | 2515437 Rongen
Rongen's picture

Surely this is bullish for Spanish bonds.

Mon, 06/11/2012 - 14:11 | 2515456 gojam
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!  :-)

Mon, 06/11/2012 - 14:08 | 2515440 chinaguy
chinaguy's picture

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

Mon, 06/11/2012 - 14:14 | 2515467 mayhem_korner
mayhem_korner's picture



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

Mon, 06/11/2012 - 14:59 | 2515616 Jethro
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.

Mon, 06/11/2012 - 14:08 | 2515442 lemonobrien
lemonobrien's picture

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

Mon, 06/11/2012 - 14:10 | 2515451 Conman
Conman's picture

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

Mon, 06/11/2012 - 15:27 | 2515722 UP Forester
UP Forester's picture

It's a zero-sum game.

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

Mon, 06/11/2012 - 14:13 | 2515463 Sudden Debt
Sudden Debt's picture

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

Mon, 06/11/2012 - 14:45 | 2515580 El Oregonian
El Oregonian's picture

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

Mon, 06/11/2012 - 15:05 | 2515646 disabledvet
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!

Mon, 06/11/2012 - 15:15 | 2515678 kridkrid
kridkrid's picture

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

Mon, 06/11/2012 - 14:17 | 2515479 icanhasbailout
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

Mon, 06/11/2012 - 15:05 | 2515641 kridkrid
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?

Mon, 06/11/2012 - 15:08 | 2515658 disabledvet
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?

Mon, 06/11/2012 - 15:17 | 2515685 clones2
clones2's picture

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

Mon, 06/11/2012 - 15:25 | 2515714 kridkrid
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)?

Mon, 06/11/2012 - 14:21 | 2515500 RoadKill
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.

Mon, 06/11/2012 - 14:27 | 2515517 Village Smithy
Village Smithy's picture

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

Mon, 06/11/2012 - 14:29 | 2515528 Terminus C
Terminus C's picture

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

Mon, 06/11/2012 - 14:32 | 2515540 SheepDog-One
SheepDog-One's picture

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

Mon, 06/11/2012 - 15:31 | 2515553 sschu
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.


Mon, 06/11/2012 - 14:56 | 2515607 Temporalist
Temporalist's picture

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

Mon, 06/11/2012 - 15:00 | 2515622 junkyardjack
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.

Mon, 06/11/2012 - 15:03 | 2515629 insanelysane
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.

Mon, 06/11/2012 - 15:27 | 2515720 withnmeans
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 !

Mon, 06/11/2012 - 15:02 | 2515635 Bansters-in-my-...
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Hurry up and live up to your user name.


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