Diplas also confirmed ISDA was reviewing definitions for both sovereign and corporate CDS, focusing on the bankruptcy and restructuring credit events. “It is fair to say that the CDS market been seriously tested and will continue to be tested in both the corporate and sovereign space”, said Diplas, who also heads up the global systemic risk management group at Deutsche Bank. He nevertheless defended CDS as “the only reliable instrument for participants to transfer credit risk efficiently”.
The CDS market has come under fire on two fronts over the past 18 months. Greek CDS exposed flaws in the instrument, from fears that sovereigns may be able to circumvent a trigger when restructuring their debt, to concern that protection buyers might not be adequately compensated for losses on bonds
Diplas also spoke of the ISDA credit steering committee’s on-going project to review CDS documentation and take into account glitches that arose around Greece CDS, including look-back clauses – which have prevented Greek CDS from trading again since the trigger in mid-March – and the potential issues around sovereign restructurings.
“What makes sovereigns unique is that while the game progresses, they have the right to change the rulebook”, Diplas noted. He also confirmed the committee is investigating ways to ensure CDS payouts accurately reflect losses on bond positions.
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