New European single-name LCDS expected soon

The International Swaps and Derivatives Association expects to publish a new single-name European loan credit default swap (LCDS) contract by the end of July.

The industry body has been working on the revised documentation since the end of 2006 with a working group of dealers, bankers and end-users, after calls for documentation for a US-style non-callable contract as well as the existing callable contract. Its finalisation was expected earlier, but a number of sticking points have delayed progress.

Isda’s London-based European general counsel, David Geen, said there was “no quick and easy way” of achieving consensus between different types of market player. “In drafting this contract, we have tried to balance the range of varying priorities of the different types of market participant and their considerations in respect of the underlying asset,” he asserted.

One of the problems that came to light was the possibility that holding European LCDS contracts could leave dealers privy to material non-public – or ‘insider’ – information regarding certain underlying reference entities.

“LCDS holders may be entitled to pass on certain information regarding the underlying loan,” said Geen. Such information is typically not made public in Europe. This means dealers will have to be careful when trading the new product, which may prevent them from dealing in listed securities linked to the same reference entity.

A pre-publication draft of the new European single-name LCDS contract is now in circulation. The current product, which has been the source of rancour among some dealers, is callable if the underlying loan has been repaid. In a compromise between dealers and hedgers, the new contract will be either callable or non-callable, and it is expected dealers will quote prices on both formats.

However, the Frankfurt-based International Index Company’s LevX index of European LCDSs will switch to the non-callable form. Dealers believe that if the single-name contracts are completed on-time, the change to a non-callable index would probably occur at the September roll. This is likely to move the rest of the market in the same direction.

The final touches to the new European product come two months after the publication of revised US documentation.