Friday, December 11, 2009

ISDA to Create Panel to Study Japan Debt Talks

Posted on Bloomberg by Shannon D. Harrington and Yusuke Miyazawa:

The industry group that sets standards in the credit-default swaps market is forming a panel of lawyers and market participants to consider whether a private corporate debt restructuring process in Japan should trigger payouts to buyers of the debt-protection contracts.

The International Swaps and Derivatives Association will form the panel after a meeting in Tokyo yesterday of about 150 traders, lawyers and investors to discuss whether the alternative dispute resolution process is a so-called credit event, New York-based ISDA said in a statement. The panel being created may make recommendations to ISDA’s determinations committee in Japan, a body of 15 dealers and investors that decides when payouts on credit swaps should be made.

ISDA’s review was prompted by a dispute surrounding credit swaps on Aiful Corp. After the Kyoto-based consumer lender entered alternative dispute resolution talks in September, the determinations committee rejected three attempts to get payouts from contracts on the company’s debt even as one bank said Aiful ceased making loan payments.

“We need a common standard amid the confusion,” said Hisayoshi Nogawa, a strategist at BNP Paribas Securities Japan Ltd. in Tokyo. “ISDA’s definition is aimed at legal liquidation, not out-of-court ones like the ADR. So they should show how to interpret the definition in relation to it.”

Parallel Mediation

Credit-default swaps, which are used to speculate on creditworthiness or to hedge against losses on corporate bonds and loans, let buyers demand payment from sellers if the underlying company fails to make scheduled interest or principal payments, according to standard definitions published by New York-based ISDA. Banks, hedge funds, insurance companies and other investors use them to insure against default and to speculate on the creditworthiness of companies and countries.

Japan’s outstanding swap contracts jumped to $887.3 billion as of June 30 from $554.2 billion a year earlier, according to Bank of Japan data. If traders determine that Aiful triggered payouts on credit swaps protecting debt holders, it would lead to Japan’s first auction to settle the derivatives.

The ISDA panel will review the issue as the Japanese Association of Turnaround Professionals, which is mediating ADR talks with Aiful and Japan Airlines Corp., said last month that it was forming a group of bankers, lawyers and government officials to review whether the ADR process should trigger credit swap payouts.

ISDA will consider the group’s findings, though the ultimate resolution will be made by the determinations committee in Japan, ISDA general counsel David Geen said in an interview last week.

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