by Helen Cunningham
The restructuring of Greece’s sovereign debt in March, which cleared the way for the country to receive a fresh injection of capital from the Eurozone, included a novel component. The deal’s mandatory bond exchange triggered a payout on the approximately $3.2 billion of net outstanding credit default swaps (CDS) that had been sold as protection against a possible Greek default.
Because this marked the first time sovereign CDS were paid out in Europe, there was some expression of uncertainty in the market and media about how the settlement process and payout would impact the markets. So everyone breathed a sigh of relief when, on March 27, DTCC announced that $2.89 billion in net payments on Greek sovereign CDS contracts had been successfully completed the previous day.
"For investors and bankers, sovereign CDS has passed its first test with Greece, the world’s biggest debt restructuring," wrote the Financial Times.
The market’s ability to swiftly and successfully manage the Greek CDS payout was attributable in large part to DTCC’s Trade information Warehouse, which captures CDS data globally, keeps it up to date and handles a range of processing functions for all the contracts in the system.
"With all eyes on the Greek debt deal, our focus at DTCC was twofold: we wanted to give regulators and market participants a clear picture of the CDS exposures and we also wanted to ensure a swift, certain and transparent payout process," said Marisol Collazo, DTCC Managing Director, Trade Information Warehouse. "The orderly manner in which it played out sent a signal to regulators, governments, markets and the public that there is transparency, as well as operational rigor, in the CDS market," she added. "The industry has created a framework and the requisite processes to facilitate the efficient handling of CDS events without disruption to the market."
While DTCC’s Warehouse has racked up significant experience processing corporate CDS credit events, the Greek deal was unique in key respects – and the stakes were high.
In addition to being the largest foreign debt restructuring on record, Greece was the first major sovereign restructuring to trigger a CDS payout. (Prior to Greece, the only other sovereign debt restructuring with a CDS component involved Ecuador and a relatively small settlement.) As a result, the CDS aspect of the deal was being closely monitored by governments around the world, particularly those in Europe, whose officials were concerned about possible ripple effects. "Initially, conflicting information about Greece’s CDS exposures fueled speculation about potential market contagion if a Greek default triggered CDS payouts," said Andrew Byatt, DTCC Vice President, Trade Information Warehouse.
The Greek CDS were also a bellwether for global investors, who had no experience with the viability of sovereign CDS as insurance against major government bankruptcies.
What’s more, because the deal was ultimately a restructuring rather than a default, firms holding the CDS had the option to either receive payment or leave the CDS coverage in place for the future. (For defaults, all CDS contracts automatically trigger payments.) This factor added another layer of complexity to the process.
Throughout the Greece debt restructuring ordeal, DTCC provided a high degree of transparency on the country’s CDS exposures.
The company was in contact with regulators around the world that were monitoring systemic risk. "In the period leading up to the event, we were able to give regulators the detail they needed on the underlying CDS transactions, as well as the big picture for all Greek CDS in the Warehouse," said Byatt. "The data enabled them to analyze exposures in the aggregate and by individual firms to assess the potential knock-on effects."
DTCC made information available to this constituency through its Regulators Portal, and also fielded many ad hoc requests for information from individual regulatory bodies.
Via the DTCC website, the company was also the source for aggregate CDS data for the industry, the public and the media, which was closely tracking and reporting on developments surrounding the Greek debt talks. (DTCC updates the public information weekly, and access to it is free of charge.) The availability of this information contributed to accurate reporting on the net notional values of outstanding Greek CDS, as well as the hugely higher gross values.
In addition, DTCC was in constant contact with the International Swaps and Derivatives Association (ISDA), providing the latest CDS data before and during the event.
Just 18 days after ISDA declared the Greek credit event, DTCC closed the door on it, transferring $2.89 billion to the 130 firms that had CDS contracts on the Hellenic Republic.
What benefits did the Warehouse infrastructure bring to the Greek CDS restructuring?
"Risk reduction, transparency, speed, certainty of settlement, operational efficiencies, real-time messaging and an electronic audit trail," summed up Christopher Nardo, DTCC Manager, Trade Information Warehouse.
Technology also made a difference. "The accelerated timetable for the Greek deal would have been a huge challenge to the industry without the Warehouse’s electronic platform," added Nardo, noting that a typical restructuring takes about 30 days compared with Greece’s 18 days.
The extensive advance work done by the DTCC team paid off when the clock started ticking on the Greek restructuring.
"Preparation is a good thing," said Byatt. "Discussions about a Greek restructuring had been circulating for more than a year and, as soon as those discussions started, we began preparatory work and analysis on Greek CDS – looking at counterparties, volumes, values, the potential number of settlements – so that when the final determination of a credit event was made, we were ready to act quickly."
In fact, DTCC had the Warehouse platform up and running for the Greek CDS just three hours after ISDA announced the event. "We knew the timeframe would be accelerated and positioned ourselves to hit the ground running," said Nardo, noting that not all credit events come with the same advance notice that Greece did.
The preparatory phase shed light on another factor the team needed to address. "We saw how a lot of smaller firms would be impacted and realized that many of them had never been through a restructuring," said Nardo. "We conducted webinars for these clients, free of charge, so they would understand and be comfortable with the process."
DTCC also had the benefit of its own extensive experience, having handled more than 139 credit events since 2008. "We know all the steps required to activate a credit event," said Byatt. "Although sovereigns were new, we have extensive experience processing corporate CDS events, some of which had larger trade volumes and settlement values than the Greece event."
A few weeks after the Greek CDS payout had concluded, Byatt summed up its overall impact. "The Greek experience further demystifies CDS for the markets, regulators and public."
And the Financial Times’ post-mortem on the payout delivered welcome news for just about everybody. "The long-running drama over Greek credit default swaps finally came to an uneventful end…for those who had bought protection against a default by Athens." @
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