The recent compromise on Greek debt involving bondholders accepting writedowns as high as 50 percent caused global ratings agency Fitch Ratings to call for reform in the market for credit default swaps (CDS).
The usefulness of these financial instruments, which provide insurance to bondholders in the case of default, has been questioned after the recent compromise on Greek debt involved bondholders taking significant losses on their investment without receiving a payout from the CDS, according to The Financial Times.
As the acceptance of the writedown is voluntary, it does not constitute a "credit event" according to the International Swaps and Derivatives Association (ISDA). Since a credit event will not be declared, the insurance policies will not indemnify the policyholders.
The ISDA wrote in a statement to be released on November 28 that "It would seem that the use of the restructuring credit event generally and the nature of the language employed should probably be revisited," the media outlet reports.
Data provided by the Bank for International Settlements indicates that the use of CDS is rising, with the notional value of the risk management tools increasing 8 percent during the first half of 2011, according to The Wall Street Journal.
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