Bloomberg News

Clearinghouses to Join Credit Swap Decisions, Diplas Says

May 01, 2012

Clearinghouses backing credit-default swaps trades will be allowed to participate as observers in decisions on payouts or contract changes as an industry group seeks to bolster the process, said Athanassios Diplas, co-chair of a swaps market governance committee.

“We recognize more can be done” to improve how the decisions are made, Diplas, global head of systemic risk management at Deutsche Bank AG (DBK) in New York, said during a panel discussion today at ISDA’s annual meeting in Chicago. Clearinghouses will be “extended observer status” on the so- called determinations committee that governs the credit-swaps market within the next few weeks or months, said Diplas, who is co-chair of ISDA’s Industry Governance Committee.

The remarks followed the release of a study by New York- based ISDA showing that the committee was unanimous 96 percent of the time in votes on credit swaps payouts or other matters related to the contracts since the panel was created in 2009.

So-called credit events are judged to set off provisions under credit swaps by committees comprising ISDA dealer banks and their customers such as hedge funds and asset managers. Committees determine whether a credit event occurred, if an auction should be held and which obligations should be delivered via the sale, ISDA said in a paper about the process released today.

Greece Swaps

In March, an ISDA committee determined that sellers of credit swaps on Greece would have to pay as much as $2.5 billion to settle contracts triggered by the nation’s debt restructuring. The settlement was determined after dealers agreed on a final value for Greek bonds of 21.5 percent of face value at an auction, according to administrators Markit Group Ltd. and Creditex Group Inc.

That same month, ISDA named the banks and asset managers that will decide over the next year if credit events have occurred. The committees are divided into five regions and include 12 dealer banks and six asset managers.

The banks with voting power in the committees for all regions are Bank of America Corp. (BAC:US), Barclays Plc (BARC), Citigroup Inc. (C:US), Credit Suisse Group AG (CSGN), Deutsche Bank AG, Goldman Sachs Group Inc. (GS:US), JPMorgan Chase & Co. (JPM:US), Morgan Stanley (MS:US) and UBS AG, ISDA said. Nomura Holdings Inc. will act as a consultant to the group and won’t have voting power, ISDA said.

Voting Power

The asset managers with voting rights are Citadel LLC, D.E. Shaw & Co., BlueMountain Capital Management LLC, Pacific Investment Management Co., and Elliott Management Corp., ISDA said. The consultative non-dealer will be MetLife Inc. (MET:US)

Clearinghouses would serve in the same capacity as the consultative members of the committees and not have voting power, Diplas said in an interview.

He said credit swaps have gotten an undeserved bad reputation in recent years.

“The instrument itself has been quite maligned,” he said. He made a distinction between custom credit swaps backing slices of mortgage-backed securities that led to a U.S. government bailout of American International Group Inc. in 2008 and the more common contracts that protect against defaults by corporate and sovereign borrowers.

“CDS doesn’t cause the crisis, it’s just a manifestation of it,” Diplas said.

To contact the reporter on this story: Matthew Leising in New York at

To contact the editor responsible for this story: Alan Goldstein at

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Companies Mentioned

  • BAC
    (Bank of America Corp)
    • $17.53 USD
    • 0.27
    • 1.54%
  • C
    (Citigroup Inc)
    • $54.1 USD
    • 1.65
    • 3.05%
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