The 'Big Bang Protocol': ISDA Streamlines CDS Settlement Through Publication Of Standard CDS Auction Terms And Related Protocol

On March 12, 2009, the International Swaps and Derivatives

Association, Inc. ("ISDA") published the 2009 ISDA Credit

Derivatives Determinations Committees and Auction Settlement

Supplement (the "Auction Supplement") to the 2003 ISDA

Credit Derivatives Definitions (the "CDS Definitions")

together with a new protocol (known as the Big Bang Protocol (the

"Protocol")) specifying standard auction settlement

procedures and related terms applicable to credit default swap

transactions ("CDS").

The fundamental components of the Auction Supplement include the

establishment of:

standard auction settlement procedures to eliminate the need

for future bespoke auction protocols;

a Credit Event and Succession Event look-back period to enhance

the fungibility of similar CDS trades with respect to the impact of

Credit and Succession Events; and

Credit Derivatives Determinations Committees (each, a

"DC") comprised of dealer and buyside representatives to

make binding determinations with respect to certain conditions and

events.

The Protocol is open for adherence until 5:00 p.m. New

York time on April 7, 2009. As a failure to adhere means

that existing trades will not be subject to future settlement

auctions and related terms, market participants are encouraged to

give serious consideration to adhere to the Protocol. As of the

publication of this memorandum, according to ISDA's website,

approximately 150 parties have adhered to the Protocol.

This memorandum summarizes the Auction Supplement and the

mechanics of the Protocol, and highlights certain issues for market

participants as they consider adherence to the Protocol.

The Auction Supplement's Framework and Covered

Transactions

The Auction Supplement is comprised of the 2009 ISDA

Determinations Committees Rules (the "DC Rules") and Form

of Credit Derivatives Auction Settlement Terms (the "Auction

Terms"). Parties can elect to incorporate the Auction

Supplement in new CDS trades by referencing the Auction Supplement

in the trade confirmation. For parties adhering to the Protocol,

the Auction Supplement will also apply to:

covered CDS trades (defined below) outstanding as of April 8,

2009;

new covered trades entered into between April 8, 2008 and

January 11, 2011; and

novated trades which would have been covered pursuant to (i) or

(ii) above if the original parties had adhered to the

Protocol.

The Protocol's coverage is split between transaction types

subject to both the DC Rules and the Auction Terms ("Protocol

Covered Transactions") and transaction types subject to the DC

Rules but not the Auction Terms ("Covered Non-Auction

Transactions"). The Protocol Covered Transactions are trade

types typically covered by past auction protocols including: (i)

certain index trades (e.g., CDX and iTraxx tranched and

untranched); (ii) certain swaptions (single name and portfolio);

and (iii) certain non-swaption trades (single name, Nth to default,

recovery lock, and bespoke portfolio transactions). Covered Non-

Auction Transactions include reference-obligation only, fixed

recovery, preferred CDS and party-specific non-auction trades.

Trade types specifically excluded from the Protocol include: (i)

loan-only CDS; (ii) U.S.-muni CDS; (iii) CDS on ABS, CDO or MBS;

(iv) certain index trades (e.g., back-to-back CDS linked

to named high-yield indexes between specified dealers); and (v)

transactions that the parties have agreed to exclude from the

Protocol as specified in the relevant confirmation.

The Auction Supplement will be incorporated into DTCC operating

procedures and will therefore apply automatically to trades with a

Trade Date or...