Tuesday, September 9, 2008

CDS triggered by US action on Fannie, Freddie

Aline van Duyn at the FT has a piece of reporting on the effect of US intervention at Fannie and Freddie.

Apparently the act of being placed in "conservatorship" is equivalent to bankruptcy, and triggers many of these "insurance" contracts. The International Swaps and Derivatives Association (ISDA) is working on a protocol to address the situation.

This protocol will likely allow adherents to amend the documentation of their contracts, most likely (if past practice rules) to take advantage of some auction pricing mechanism.

Depending on the specific documentation (I haven't seen any) there could also be disputes over whether the "conservatorship" was actually a triggering event. Whether something actually constitutes a triggering event can be a notoriously tricky question.

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