Regulators ask if Credit Suisse bond wipeout must trigger insurance payout

By Min Jeong Lee and Takahiko Hyuga

A derivatives panel tasked with overseeing the credit default swaps market has been asked to rule whether the write down of Credit Suisse Group AG’s riskiest debt qualifies for an insurance payout. 
 

The question on whether a so-called governmental intervention credit event had occurred on swaps that were insuring Credit Suisse Group AG’s bonds was submitted by a market participant, according to a notice on the website of the Credit Derivatives Determinations Committee (CDDC) —  a panel of 13 banks and asset managers. 

The five-year default swaps tied to Credit Suisse Group’s AG’s junior debt rose by 36 basis points on Thursday to 397, according to CMAI pricing. 

The Swiss banking regulator’s decision to wipe out around $17 billion of Credit Suisse’s Additional Tier 1 notes as part of a takeover deal by peer UBS Group AG, while shareholders managed to salvage some value, drew consternation from bondholders. Global investors have filed legal challenges against the regulator’s decision. 

The market participant who submitted the question noted that the panel will need to decide whether or not the AT1 notes that were written off are too junior to be linked to the credit default swaps, the notice on the CDDC’s website said. 

Funds including FourSixThree Capital and Diameter Capital Partners have been buying these swaps on the basis that the write-down could prompt a potential payout of the derivative contracts. Law firm Kramer Levin has been helping with efforts to make a case for a triggering event. 

Market participants can submit questions to the panel if they think the terms in the swap contract that would prompt a payout have been met.