Last week was supposed to be the big kickoff for the standardized credit default swap protocols designed by the International Swaps & Derivatives Association. But one big player in the CDS market refused to sign up for the overhaul of the global derivatives market: AIG’s Financial Products group.
AIG confirmed to the Financial Times that it did not adopt the “Big Bang” protocol that has been signed by more than 2,000 market participants. The protocol is supposed to create a standard procedure for resolving swaps when debt defaults occur. It became effective on Wednesday.
AIG Financial Products is instead making bilateral agreements with counterparties on more than 200 outstanding derivatives trades. The official story is that AIG’s swaps are so complex tthat it is easier to negotiate with individual counter-parties rather than adopt a catch-all rule. No doubt critics of past AIG payouts to counterparties will suspect that AIG is avoiding the protocol so it can continue to act as a conduit for cash to troubled banks.
The move isn’t expected to derail the ISDA CDS reform. “Senior bankers and AIG downplay AIG FP’s absence from the protocol as the unit unwinds its legacy positions, runs down its portfolio and is no longer an active participant in the market,” the FT reports.