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If Argentina doesn’t pay the bondholders that are suing the country for sovereign debt dating back to 2001, it could go into default.But someone has to officially determine that the country is in default, triggering credit default swaps.
In the global financial community, that decision is the responsibility of the Credit Derivatives Determination Committee, a board that was formed in 2009.
Incidentally, Elliott Management Corporation, the hedge fund that belongs to Paul Singer, one of the plaintiffs in the case against Argentina, is a voting member of the Credit Derivatives Determination Committee.
Argentina has been fighting with Singer, and other bondholders that bought its sovereign debt maturing in 2017, for about a decade. Singer and co. ( known as exchange bondholders) refused to restructure the debt that they held on two occasions, in 2005 and 2010.
Argentina, in response, refused to pay its debt to exchange bondholders, instead favouring bondholders that restructured.
Now the case is coming to a head. So far, there has a been a stay placed on Argentine payments to exchange bondholders during Court proceedings. Last week, though, New York Judge Thomas Griese ruled that Argentina would have to pay the plaintiffs next month. If that holds true, the country will have to pay out $3 billion to exchange bondholders alone.
This could be what a 2012 Argentine credit event looks like. And this is where the Credit Derivatives Determinations Committee comes in. Here’s what they do:
The ISDA Credit Derivatives Determinations Committees (“DCs”) were established on April 8, 2009. The DCs make determinations that apply to credit derivative transactions on subjects including Credit Events, CDS Auctions, Successor Reference Entities and other issues. The determinations made by the DC are governed by the Determinations Committees Rules. ISDA acts as a non-voting secretary to each DC and endeavours to co-ordinate this process in a transparent and operationally efficient manner.
Elliott Capital is known as a “non-dealer voting member” of this committee. According to the DCs bylaws, it was chosen for this position at random from a list of eligible non-dealers “designated as not having been previously identified to serve on a Committee and designated as a “private investment company manager” or “registered investment company manager”…” on the appointed list review date.
Now before we start up with the conspiracy theories. Let’s take a look at the process the committee uses to determine whether or not a nation is in default.
In the Americas, there are 17 voting members on the board. A supermajority of them must all agree that a country is in default for the decision to be made.
The DC has a fascinating paper about how that works. Here’s a telling excerpt:
Of the more than 900 DC questions considered to date, approximately 96% have been decided unanimously. This is because the vast majority of determinations made by the DCs are determined by straightforward application of publicly available facts to the relevant provisions of the Credit Derivatives Definitions. The following statistics are as of March 7, 2012:
For the last 10 Credit Events, the average DC deliberation time between the date the DC was asked whether a Credit Event had occurred and the date on which a Credit Event was announced was one day in the Americas and three days in Europe. For the last five Credit Events in Asia & Oceana, the average time was five days.
If the DC can’t come to an agreement, the decision goes through an External Review process involving third party market professionals and legal experts. Throughout this process, members are bound by confidentiality agreements and are unable to trade on any information they are privy to from being on the board.
So even if Singer voted for Argentine default, that wouldn’t mean that he would get his way if that data weren’t there.
More than that, experts who have gone head to head with Singer (legally speaking) believe he would recuse himself in the event of a conflict of interest. Take William A. Brandt, Jr., for instance.
Brandt is the President of Development Specialists Inc. and is considered one of the country’s premier bankruptcy and restructuring experts. He’s also the Chairman of the Illinois Finance Authority, the largest state bond issuer in the United States. Despite his own experience being on the other side of Singer’s wrath, he says no one should believe that he will use his status on the DC to call for an Argentine credit event.
“I would divorce the decision to put a country in default from his own position,” said Brandt. “There are bright line tests that countries must pass for that decision to be made.”
If a country passes those tests, credit default swaps are triggered, and we know what kind of chaos follows.
It doesn’t get much more serious than that.
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