Given the TBTF's dominant oligopoly of the credit derivatives market (due mainly to the large exchange's unwillingness to act appropriately when they know the blow-back from their sell-side clients would be considerable), it is perhaps surprising that ISDA (the body that 'regulates' watches over and determines credit events in the CDS market) is coming under increasing pressure to honor the spirit of CDS contract after the FUBAR debacle surrounding the Greek restructuring. As Katy Burne notes in today's WSJ [5], ISDA is set to decide on a revamp of the CDS rules within weeks as pressure from the buy-side (the other side of the trade obviously) to alter the legal wording governing what is (and is not) a credit event trigger. "Whether it is a series of small fixes or a root-and-branch rewrite is still to be decided" but we note that the market - as we discussed in depth with regard to Portugal [6] over the weekend - is becoming more comfortable once again with the CDS contract as a hedge against 'problems' in the $2.9 trillion sovereign credit derivatives market. This is without doubt a positive step - as opposed to the typical silent arrogance of the ISDA or more broad dismissal of CDS (ban them - they are to blame) arguments that political leaders will tend to bias to. The simple fact of the matter is that CDS have been a much less manipulated market indicator of real-money stress than bonds for much of the last four months and with Portugal's basis normalizing (presumptively on the back of lower concerns at CDS event risk dislocation), perhaps real-money will slow its bond selling (choosing to hedge instead) and/or Italian/Spanish banks will be forced to buy back protection en masse to cover the huge leap in exposure they have taken on - especially with the surcharge chatter of Basel III re-appearing.
Portugal's CDS-Bond basis imploded as traders lost confidence in CDS as a EU sovereign restructuring hedge...
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