Today, the International Swaps and Derivatives Association, Inc. (ISDA) announced the successful implementation of the ISDA Credit Derivatives Determinations Committees and Auction Settlement CDS Protocol (otherwise referred to as the “Big Bang” Protocol), with over 2,000 parties adhering to the Protocol. The Big Bang Protocol, which opened on March 12, 2009 and closed yesterday, represents the final step in “hardwiring” or incorporating auction settlement terms into CDS documentation. Robert Pickel, executive director and CEO of ISDA, describes hardwiring as “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.”

The Big Bang Protocol permits an orderly transition to a number of new terms for common CDS transactions. The new terms, contained in ISDA’s Credit Derivatives Determination Committees and Auction Settlement Supplement to the 2003 ISDA Credit Derivatives Definitions, include the following:

  • Auction settlement as a settlement method for CDS, eliminating the need for credit event protocols to cash settle CDS transactions;
  • Binding determinations made by the Determinations Committees, established by ISDA last week, as to whether a credit event has occurred, an auction will be held and a particular obligation is deliverable;
  • Backstop dates for credit events and succession events that effectively institute a common standard effective date for CDS transactions on the same reference entity; and
  • Shifting of foreign currency conversion risk to parties best able to manage the risk.

In addition, a change is being instituted to CDS market practice so that CDS will trade on the basis of periodic fee payments (coupons) of 100 basis points or 500 basis points.

For a further detailed description of these new terms, please click here.