Today we were treated to two news stories in two newspapers on one topic: the process for determining whether a credit event has occurred with respect to Greek sovereign CDS.
On the one hand, there’s The Washington Post: “For Greece, a critical conference call between London and New York.” (A follow-up story is here.) On the other hand, there’s The Wall Street Journal’s “Hushed Up: Secret Panel Holds Fate of Greek CDS.”
An important part of the credit event process – and an important element in each story – are the ISDA Determinations Committees (DCs). The DCs are 15-member panels of representatives from banks and investment firms. A supermajority (12 of 15) of each DC’s members is required to make a determination. Here’s how the Post describes the process and the DCs:
“The banks and other investors who buy and sell the swap contracts have agreed to the arrangement as a way to centralize what had been an ad hoc, company-to-company process of deciding whether a credit default swap payment was warranted.
“The committees are set up with competing interests in mind. The group meeting in London and New York on Thursday includes representatives of major European institutions like Deutsche Bank, as well as private investment funds like Blue Mountain Capital, that might have different points of view.
“A supermajority of 12 committee members is needed to make a determination either way, and if the panel deadlocks the issue would be sent to a new group of three outside arbiters. Some 59 cases have gone before ISDA committees so far without follow-up litigation, and only one has been referred to an outside panel.”
Contrast this with the Journal’s take. First, there’s the headline about a “Secret Panel.” The DCs are said to be “secretive” and “rarely elaborate on decisions.” “No outsiders can participate in the meeting…No transcript will be made public. When a decision is announced, expected before Monday, the committee doesn’t have to provide an explanation. There is no opportunity for investors to appeal.” Critics “question the impartiality of the process.”
It’s a bit of a mystery why the story characterizes the process as so “secretive.” The names of the firms on the DC are public, as are their votes. The process by which the DC members are selected, and the rules governing the DCs, are also public. Their decisions are publicly announced. At times, public explanations for those decisions are provided, but often this does not appear to be necessary (such as when the vote is 15-0).
In addition, the process, as the Washington Post article notes, was built to address conflicts of interest. The credit event/DC process has worked extremely well for 3+ years. It has handled dozens of credit events without incurring a single legal challenge. If a supermajority isn’t reached, the decision goes to a panel of outside experts. A supermajority has not been reached only twice in all the times the DCs have agreed to consider a question.
In sum, we think the credit event/DC process is fair, transparent and well-tested. There’s simply no evidence to the contrary. Perhaps after today this non-secret secret will be a secret no more.
Note: ISDA’s EMEA Determinations Committee determined today that a credit event has not occurred with respect to recent questions on the Hellenic Republic restructuring. A copy of the press release is available on ISDA’s website.