German CDS switch creates credit-linked note mismatch

Note issuers fear losses after relabelling of swap contracts creates subordination discrepancy

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Issuers of credit-linked notes referencing German banks face a possible dislocation in contracts used to hedge the products, after an industry-wide protocol transferred swathes of senior credit default swaps (CDSs) on those entities to a more junior transaction type.

On the face of it, the International Swaps and Derivatives Association’s German Bank CDS protocol, which resulted in 344 firms switching senior German bank CDS to the senior non-preferred transaction type, was little more than a