Credit events in the credit derivatives market often spark a lot of debate, but the issues relating to a possible restructuring of a Noble loan have been particularly hotly debated by the industry. That’s resulted in plenty of column inches in the media, which is good: it’s important that these events are discussed and deliberated, and the issues are widely broadcast to the broader industry.
On the issue of Noble, however, there are a couple of important facts we think need to be clarified. First, the determinations on whether a credit event has occurred aren’t made by ISDA. They are actually made by industry Determinations Committees (DCs) each comprising 10 sell-side and five buy-side participants. These 15 firms vote on whether a credit event has occurred depending on the publicly available information, the criteria set out in the Credit Derivatives Definitions and the rules on governance set out in the DC rules. ISDA acts as secretary to the DCs and administers the process – we don’t have a vote and we don’t make the decisions.
Saying ISDA makes the decisions is akin to saying ICE Benchmark Administration (IBA) decides what the LIBOR rate should be. After all, it’s now called ICE LIBOR and is published on the IBA website. But IBA administers the process – the actual LIBOR rates are based upon submissions from LIBOR contributor banks.
Second, some of the stories imply that the DC rules failed to provide for the Asia ex-Japan DC’s decision to dismiss. That’s incorrect. As the DC statement of August 10 states, the DC felt it did not have sufficient information to determine the DC question one way or the other, because it was not able to get hold of the underlying loan documentation and details of the guarantee. Market participants crave certainty, and so the lack of public information on the Noble loan and guarantee has created confusion and frustration in the market. The rules do allow the DCs to dismiss a question, which requires an 80% supermajority vote, and provide for the bilateral triggering of contracts in the event a question is dismissed. Now, people can argue that a different outcome would have been preferable, but they can’t argue that the potential for a dismissal isn’t set out in the rules as they stand.
Credit market participants have not had to bilaterally trigger a credit derivatives contract for some time. The complexity, operational risks and potential for disputes that it creates was one of the reasons why the DCs were established in the first place back in 2009. ISDA’s members played an important role in facilitating the determinations framework, and, in our role as secretary, we’ve worked with each of the five regional DCs to improve the transparency and governance of the DC process. There’s likely to be plenty of feedback from market participants on changes that could be made to avoid bilateral triggering exercises in future. ISDA will pull that industry comment together, and will feed it back to the DCs. Where we can lead industry debate and propose solutions, we will. It’s in everyone’s interests for this market to work as safely and efficiently as possible.