LONDON - The Loan Syndications and Trading Association said last week that the International Swaps and Derivatives Association (ISDA) has formed a working group that will determine the most appropriate approach to creating a noncancelable loan-only credit default swap (LCDS) product in Europe, which should encourage more trading in the market. The announcement was made at the LSTA conference held here last week.
In the U.S., the desire to create something that could be sold led to the creation of noncancelable products, but in Europe, the motivation has been driven by a desire to create a hedging instrument. However, that sentiment is shifting, and the market has started to see more single-loan trading based on new players entering the market. In fact, panelists at the conference said that there has been more of a desire from the market to create a trading product for Europe.
As the market heads toward more convergence, it is likely that European players will look to adopt more U.S. LCDS product standards, but panelists said there is still a long way to go before the markets could trade on a truly global platform.
Because of the complex rules that still exist in Europe - such as varying bankruptcy regimes - refinancing could result in different reference entities, even though the collateral package remains the same. Any noncancelable product in Europe would have to address the repayment of the existing facility or acquisition financing where the collateral would remain basically the same.
The largely private European loan market is also a hindrance to creating better trading standards. Panelists at the conference said that the lack of transparency means Europe cannot have a dealer poll to determine the deliverability of the LCDS - creating a more public market would shift Europe more in line with U.S.-styled dealer polls.
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