A day after dismissing a question that would have forced a payout on some of Credit Suisse Group AG’s default swaps, a panel that oversees the derivatives market received another query that could trigger the contracts.
(Bloomberg) — A day after dismissing a question that would have forced a payout on some of Credit Suisse Group AG’s default swaps, a panel that oversees the derivatives market received another query that could trigger the contracts.
The Credit Derivatives Determinations Committee was asked whether a bankruptcy credit event had occurred with regards to the Swiss lender in March, when it was taken over in a hastily arranged deal by rival UBS Group AG, according to a statement on its website.
The ploy is seen as having little chance of success. One market veteran equated it to “throwing spaghetti on the wall.” The new question came in after the CDDC on Wednesday determined that another type of credit event — a government intervention — hadn’t occurred after the $17 billion of Additional Tier 1 notes were wiped out. The committee took the view that the AT1 securities were too junior to trigger Credit Suisse’s subordinated CDS contracts.
This question is different. It relates to both senior and subordinated CDS. So if the panel rules that a bankruptcy event had occurred, it would trigger payouts on swaps tied to all of Credit Suisse debt. The net notional volume on those swap contracts amounted to $1.74 billion as of May 12, according to data from the Depository Trust & Clearing Corporation.
The credit default swaps tied to Credit Suisse Group had been tumbling following Wednesday’s decision. After the second question was asked, the one-year senior swaps were still indicated 102 basis points down to 149, while their one-year subordinated counterparts were still down 584 basis points on the day to 197 as of 2:30 pm London time, according to ICE Services data.
The main difference between the two questions is that a bankruptcy credit event relates to the issuer’s finances, while a governmental intervention credit event involves a state happens when the intervention by the state leads to a reduction in the interest or the principal of the bonds underlying the swaps.
Hedge funds including FourSixThree Capital and Diameter Capital Partners had bought into the subordinated contracts betting on a payout after Credit Suisse’s roughly $17 billion of Additional Tier 1 bonds were wiped out as part of the deal. Market participants at Citigroup Inc, Barclays Plc and JPMorgan Chase & Co. had been telling their clients that the AT1s were likely to be deemed more junior than the subordinated notes linked to the default swaps — making a payout unlikely.
These developments on the default swaps front are the latest twist in the Credit Suisse saga. The controversial write-off of the risky AT1 bonds is being challenged by many of its bondholders in court. A Swiss court has recently ordered Swiss regulator Finma to release the decree that allowed for the wipeout.
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