DERIVATIVES: Dealers await green flag to trade Greek CDS

Major banks are waiting for confirmation from the International Swaps and Derivatives Association that they are free to start trading credit default swaps on Greece again, two days after a successful auction was held on the old contracts.

Dealers say they are ready to start quoting new Greek CDS, but are wary of a look-back clause in standard contracts that could technically allow users to trigger their protection by citing the recent Greek credit event.
Two major dealers said they would not start trading until ISDA clarified these look-back clauses will not be able to reference the decision by the ISDA Determination Committee on March 9 that Greek CDS had triggered.
“There is an issue because of the look-back option that CDS contracts have. If we write a CDS now, our counterparty could try and trigger on us. We’ve raised the question with ISDA and we’re waiting to hear back. Until we do, we’re not going to trade it,” said one head of sovereign CDS trading at a major European bank.
ISDA declined to comment, but is understood to be looking into the issue. Standard CDS contracts have a look-back clause to cover certain scenarios. For instance, the ISDA DC may take a long time to decide on a credit event, and credit protection may be written after the question is raised but before the trigger has been determined. The look-back option would ensure these contracts can still be triggered if needs be.
“It’s a technicality,” said the trading head. “We’ve done the CDS auction and it’s settled – we just need to get some official announcement that anything that trades from now on will need a new credit event to be triggered.”
It is unclear, however, whether all banks are holding fire. Gavan Nolan, director in credit research in Markit, said there have been a few quotes on five-year Greek CDS with the mid-market price in the 70 to 72 points upfront range – only six to eight points tighter than where it was trading prior to the trigger. There is no evidence to suggest that dealers had executed on these prices, though.
Once ISDA clarifies the situation, market-makers said they would happily begin trading Greek CDS again. However, they pointed out the contract would likely be fairly illiquid.

http://www.ifre.com/derivatives-dealers-await-green-flag-to-trade-greek-cds/21007297.article