Insurers enter the credit derivatives restructuring debate

A group of insurance companies active in the credit derivatives market has submitted a letter to the International Swaps and Derivatives Association suggesting language changes to the trade association’s restructuring definitions. The insurers are pressing for restructuring to be dropped as a credit event and are currently contesting whether Xerox’s debt restructuring should constitute a pay-out trigger.

Kimberley Summe, Isda general counsel, said the restructuring issues have yet to be resolved, and Isda is involved in daily meetings with its G6 credit derivatives working group, which includes hedgers, investors and dealers, to come to an agreement as soon as possible. The insurance companies, which include Financial Security Assurance, MBIA Insurance and Ambac, have attacked Isda for providing unworkable restructuring definitions.

In a recent survey by the G6 working group, Isda found that most loan houses believe they are required to include restructuring as a credit event for regulatory capital purposes. This could well be the case when the Basel II Capital Accord is implemented in 2006, since the Basel Committee is showing no signs of backing down from its requirement for banks to include restructuring as a credit event.

“To make progress on the restructuring debate, all parties have to reach a middle ground,” said Richard Williams, London-based head of asset management and risk transfer at Abbey National Treasury Services. “Restructuring is partly driven by Basel-related regulatory capital concerns but it is also a real risk transfer mechanism. The ability to trigger has to be clarified.”

Isda is holding an annual members' update meeting in London today.