On September 23, 2019 over 150,000 European travelers were left stranded after Thomas Cook Group Plc, the United Kingdom-based travel agency, abruptly canceled all of its bookings.
The cancelations came as the 178-year-old firm announced that it had filed for Chapter 15 bankruptcy protection in the United States, triggering a $4.5-billlion gross payout on counterparties' default insurance on the agency’s debt. While such an event could have caused a ripple in the markets, thanks to DTCC's Trade Information Warehouse (TIW), the payment was netted down to $1.4-billion and settled at a two-thirds reduction in gross value.
Seamless Credit Event Processing
The TIW has undertaken the seamless, efficient processing of credit events like this one since its creation in 2006, delivering tremendous efficiency and risk-mitigation benefits to the market.
Thomas Cook stands out for being one of TIW's largest recent credit events, in terms of number of positions processed – of which Sears Roebuck’s default in October of 2018 is another example– but it was unremarkable in every other way.
“What was notable was the absence of drama,” explained Marcus Denne, Executive Director, TIW Product Management. "We routinely manage the payment calculation and, in some cases, payment settlement of thousands of positions for bankruptcies like Thomas Cooks' without causing any market disruption, demonstrating that TIW is operating the way it should, streamlining processes that used to be extremely cumbersome for market participants to handle."
The TIW processed the event following publication of the ISDA-led October 30 auction results, achieving a 4:1 netting efficiency for 10,396 trades, of which 7,359 were still active at the time of the auction.
After collaborating with major dealers in 2003 to introduce a CDS payment reconciliation service, DTCC in 2006 established TIW, the industry’s first infrastructure for record retention and asset servicing of credit default swaps worldwide.
Although its activities are now generally considered business as usual, TIW has had a tremendous impact on the CDS market. Ever since the global financial crisis in 2008 and 2009, TIW has been an important source of information on the size and depth of this market. TIW is also responsible for processing corporate mergers and defaults for the outstanding CDS positions on those underlying entities, including the Washington Mutual default processed by TIW in 2008. Dozens of such credit events occurred during the 2008-2009 crisis, 50 of them in 2009 alone.
“But TIW does more than routine lifecycle processing,” said Val Wotton, DTCC Managing Director, Product Development and Strategy, Derivatives and Collateral Management. “It helps the industry implement protocol changes that occur from time to time and require absolute precision.”
Protocols are issued by industry body ISDA to multilaterally amend the language or terms of ISDA standard contracts, often in response to regulatory or legislative developments. With its track record of seamless processing and the trust it has earned from market participants, TIW is the entity the industry relies on to carry out large-scale records modifications necessitated by ISDA protocols. ISDA’s German Bank CDS Protocol, issued in February 2019, is just the latest to be implemented by TIW.