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The International Swaps and Derivatives Association last week unveiled a protocol that will allow cash settlement across a broad spectrum of credit derivative products - including single name index tranches and plain vanilla credit derivatives. The protocol is essentially the same as those used for half-a-dozen credit events since the May 2005 bankruptcy of automotive supplier Collins & Aikman Corp. to settle covered index trades.
The protocol is "on the shelf" until the first credit event occurs, said Louise Marshall, spokeswoman for the ISDA, and will be incorporated into the new set of credit derivative definitions the ISDA plans to release next year. The definitions will also address dispute resolution.
While several ad hoc cash settlement templates have emerged amid the growth in the credit default swap (CDS) market, incorporation of a permanent cash settlement option into the organization's credit derivative definitions highlights the notion that physical settlement - actually delivering the bond referenced by the trade - is becoming impractical because of the market's sheer size. The announcement came on Wednesday, as the 16 major derivative dealers sat down with the Federal Reserve Bank of New York for the third time to discuss progress toward strengthening the legal and technological infrastructure underlying derivative trades.
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