NEW YORK, July 25, 2014 – John Williams, partner in Milbank, Tweed, Hadley & McCloy’s Alternative Investments Practice Group, was quoted in a recent Risk article titled “Scotland secession: would UK CDSs be affected?” The article examines how succession events relevant to holders of protection on public debt could potentially be affected by nuances in the wording of legacy credit default swap (CDS) contracts, using Scotland’s imminent secession from the UK as a specific example.
Regarding certain vagueness of definitions in the contracts that underpin CDS protection on the UK, Mr. Williams comments that, “In the corporate context, you could say there was a succession event, but the contracts don't split because less than 25% of the debt was transferred. With sovereigns, however, the 2003 definitions aren't that explicit. Of course, traders won't care if, technically, there is a succession event; they will only care about whether the contract will split. As there's no specific guidance in the 2003 definitions to support a split on the basis of movement of 10% or so of the obligations, I suspect the determinations committee would decide there should not be one. The determinations committee won't bother to declare a succession event if it doesn't mean splitting the contracts.”
