ISDA implements 'Big Bang' CDS protocol for credit derivative trades

By Susanna Moon

Chicago, April 8 - International Swaps and Derivatives Association, Inc. said it implemented its 2009 ISDA Credit Derivatives Determinations Committees and Auction Settlement CDS Protocol, or "Big Bang" protocol.

More than 2,000 parties adhered to the protocol, which closed on Tuesday, according to a press release.

ISDA said the protocol represents the final step in the process known as "hardwiring," or the incorporation of auction settlement terms into standard credit default swap documentation.

"The successful implementation of our Big Bang Protocol constitutes a major achievement for ISDA and for the industry," Robert Pickel, executive director and chief executive officer, ISDA, said in the release.

"Hardwiring is central to the many improvements ISDA and the industry are making in the ongoing refinement of practices for the efficient, liquid and transparent conduct of the CDS business. In adapting a tactical solution, ISDA has helped develop a strategic direction for the industry," Pickel said.

ISDA said it also attracted commendation for its hardwiring process from the senior supervisors group in its report, "Observations on management of recent credit default swap credit events," and separately from the Federal Reserve Bank of New York.

The new terms, which are contained in ISDA's 2009 March supplement and incorporated into existing CDS documentation by the Big Bang protocol, became effective Wednesday and include the following:

• Adds the concept of auction settlement as a settlement method that will eliminate the need for credit event protocols to cash settle CDS transactions;

• Incorporates the resolutions of the determinations committees into the terms of standard CDS contracts, which will make binding determinations for issues, such as whether a credit event has occurred, whether an auction will be held and whether a particular obligation is deliverable. Information related to the determinations committees is available at isda.org/credit; and

• Adds credit event and succession event look-back provisions (or backstop dates) into the CDS documentation that institute a common standard effective date for CDS transactions. Under the Big Bang protocol, these look-back provisions will come into effect for legacy transactions on June 20.

In combination with the changes in market practice that support standard coupons for CDS, ISDA said these developments will introduce greater certainty to transactional, operational and risk considerations for treatment of CDSs.

ISDA is based in New York and represents participants in the privately negotiated derivatives industry.

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