Milbank LLP Alternative Investments partner John Williams, who leads the firm’s Derivatives practice, was recently featured in a Risk.net article titled “CDS Committee to Rule on Scope of Eligible Russian Debt.”
A group of banks and buy-side firms are deciding whether bonds with ruble payment options could trigger credit default swap (CDS) contracts. Though this is usually discussed after the relevant events take place, Mr. Williams agrees that, “It has become clear over time that there are certain circumstances where an issue is clearly foreseeable and the market would function better if you were to answer the question ahead of time.”
Since the “ISDA-published physical settlement matrix specifies that obligations that can trigger a credit event for standard emerging European and Middle Eastern sovereigns must not be in a domestic currency, while debt deliverable into an auction must be in the ‘specified currency,’” Mr. Williams clarifies that, “The terms that are subject to interpretation in this case are ‘not domestic currency’, which says any obligation that is payable in any currency other than the relevant domestic currency, and ‘specified currency’ that says the obligation is payable in a standard specified currency – one of the six hard currencies, basically.” He adds that because the definitions were not specifically written with this situation in mind, “You have to read words into it either way. All you have on the page: ‘is payable in a standard specified currency’. So you either have to say that that means ‘is capable of being paid in a standard specified currency’ or ‘is payable only in a standard specified currency’ because that clause is serving as an additional deliverable obligation characteristic, it’s part of the floor, so to speak, of the necessary terms for debt that you’re going to provide protection on. You wouldn’t want that floor to have a trapdoor.”
