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Part - VII

Even in the case of a relatively straightforward default swap, there is a multiplicity of issues to be negotiated. These issues may include the definition of "contingent credit event"-what will happen in the event that a reference debt asset is taken off the market during the life of the swap, how settlement will occur and so on. "Standard ISDA documentation, which is on the way, will help to make this process less arduous," says Rayner. "And once two counterparties come to an agreement on one deal, future negotiations can be considerably more streamlined." He emphasizes that the best brokers try to ensure that both counterparties have the internal and legal resources to resolve negotiations in a timely fashion, so that delays and subsequent market movements will not affect the economic rationale for the transaction.

But help is on the way. ISDA is currently in the final comment period for a standard credit swap confirmation; this document includes a menu of transaction attributes that theoretically will allow users to describe idiosyncratic deals with generic documentation. ISDA's documentation committee is also at work on a set of generic terminologies, including a definition of default.

"Because credit is rather idiosyncratic, it may be impossible, even with standard documents, to completely eliminate the negotiation component of conducting a credit transaction," says Morgan's Masters. "However, the ISDA documents are very flexible, and they will allow counterparties to select from a menu of defined choices rather than starting from ground zero." Masters adds that as financial institutions do more credit deals, they will get better at rapidly processing the related documentation in a timely fashion. "I think firms have gotten much better at processing documents, and I doubt that it is a serious impediment to liquidity."

Regulatory uncertainties that have hurt liquidity are also on their way to resolution. "We have seen a lot more interest from regional banks since the Federal Reserve and Office the Comptroller of the Currency (OCC) came out with more clear guidance on their treatment of credit products this September," says Chase's Whittaker.

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* Contributed by -
Prashant Jadhav,
2nd Year PGeMBA (Finance),
Mumbai Educational Trust (MET) Schools of Management, Mumbai.