Diary of a Financier

ISDA Declares Greek Default, Credit Event Triggers CDS

In Capital Markets on Fri 9 Mar 2012 at 16:08

Just a quick note on the topic as I sort thought the rubble.  This all feels a bit ominous.  First, I received an email and a call around 1:44pm est:

‘ISDA says Greek CDS triggered, credit event.  No confirmation or announcement yet.’

By 2:05, I was watching Volatility (VIX) tick up about 10bps off lows with little reaction in other markets.  After a few more minutes, I noticed a discernible pause in equity indices, and the US Treasury market started ascending off lows–especially the long end of the curve.  EURUSD didn’t really blink after an initial 10pip roundtrip up… and down… then up again.  The last two hours of the trading day presented odd inter-asset correlations that communicate nothing more than confusion among traders:

I refreshed a few websites while making a few calls to find some type of confirmation.  Clusterstock picked up the story and reported that an ISDA spokeswoman, Lauren Dobbs, “denied the veracity of this report.”  I turned to my partner, “Whoever falls on the side of misinformation should lose their job after this.”

Then the affirmative headline streaked across my terminal’s news ticker.

I heard CNBC squawk in the background:

‘Breaking news: the first, and therefore the largest, default in the developed world since WWII.  That’s over 60 years.’

The details leaked forth:

  • ISDA auction: March 19, 2012
  • Net outstanding Greek CDS: $3.16b maximum settlement (per DTC)

Then I saw a few MDs outside my office door start toward the exits around 3:00. (Everyone leaves early on Fridays.) “We get the default announcement, and you’re leaving?”  Without thought, one guy shouted back, “Everyone knew that was coming.”

Morgan Stanley’s David Darst on CNBC echoes, “Everyone knew this was coming.”

$3.16b maximum settlement changing hands among CDS counterparties.  Relatively, that’s not a lot.  However, that number only constitutes the visible market, where contracts are marked-to-market daily and collateralized (or at least they should be).  The opaque OTC market is where the wild things are. Nobody knows how big of an elephant resides in that room.  In either the DTC or OTC market, if one bank–as a counterparty short the CDS–defaults on its payment, net CDS exposures suddenly start to resemble gross numbers.  Is there a weak nationalized bank in Europe holding the hot potato?  (i.e. a Greek bank or a modern Credit-Anstalt.) We will find out soon after March 19.

Some required reading for the weekend:

  1. How Gross & Net CDS Notionals Work– FT Alphaville’s review of how the CDS market works, including key terminology.
  2. The ISDA CDS Settlement Auction– ZeroHedge’s definitive guide to the CDS settlement auction process.



ISDA declares Greek credit event,

CDS payments triggered

By Daniel Bases

NEW YORK | Fri Mar 9, 2012 3:39pm EST

NEW YORK (Reuters) – Greece triggered the payment on default insurance contracts by using legislation that forces losses on all private creditors, the International Swaps and Derivatives Association said on Friday.

The decision by the EMEA Determinations Committee to declare a so-called credit event was unanimous, ISDA said in a statement.

Markets showed little reaction to the widely expected decision. The euro edged lower against the U.S. dollar while U.S. Treasury prices saw losses pared after the ISDA announcement.

The ISDA said the use of “collective action clauses (CACs) to amend the terms of Greek law governed bonds issued by The Hellenic Republic such that the right of all holders of the Affected Bonds to receive payments has been reduced.”

The “credit event” ruling means a maximum of $3.16 billion of net outstanding Greek credit default swap contracts could be paid out, though the actual amount is likely to be lower because bondholders are not losing all of their original investment.

ISDA said the auction will be held to determining the actual payout amounts on March 19.

Greece said it would use the newly passed legislation that included the CACs to force private creditors into a bond swap.

This follows creditors’ voluntary tendering of 85.8 percent of the 177 billion euros ($232.22 billion) in bonds regulated by Greek law. The use of CACs should boost participation to an estimated 95.7 percent.


  1. […] the best I can do is manage risk. I’m considering going market neutral for March 19th’s ISDA auction for Greek CDS. I plan to keep my long book and hedge the entire exposure, rather than blowing-out […]

  2. […] I still plan to hedge my long book for March 19th’s ISDA Greek CDS settlement, the aggregate of my analyses […]


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