S&P slams Isda’s proposed changes to default swaps definition

Standard & Poor’s Ratings Services says it strongly objects to a proposed change in credit derivatives documentation language currently being considered by an International Swaps and Derivatives Association (Isda) working group.

If approved, the amended language would allow for the triggering of credit default swaps contracts where public information that “reasonably supports” the occurrence of a credit event is available. Current language is more precisely worded – requiring publicly available information that “confirms” the occurrence of a credit event.

“If Isda’s proposed language change is implemented and included in new collateralised debt obligation [CDO] deals that S&P rates, we would ask that it be struck-out and the old language included instead,” Terrence McCarthy, a New York-based analyst in the structured finance group at Standard & Poor’s, told RiskNews.

The rating agency uses historical data to determine the credit risk of CDOs. McCarthy told RiskNews that the increased likelihood of credit events that may accompany any language change would not be captured in its default study, which is culled from confirmed publicly available information. To implicitly account for the proposed softer language, Standard & Poor’s would need to revisit its default probability assumptions, McCarthy added.

Moving from more precise to more vague language may ultimately lessen default swap liquidity, as it could lead to an increased number of disputes, Standard & Poor’s also claimed.