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Friday, 2 March 2012

ISDA conflict of interest

The International Swaps and Derivatives Association (ISDA) is responsible for determining whether or not losses from failed bonds are covered by insurance.  It is surprising to note that some voting ISDA members appear to be the sellers of that insurance, and therefore would have a conflict of interest.

Bonds are usually insured by credit default swaps (CDSs) or other "over-the-counter" (OTC) financial derivative instruments.  Bond holders buy insurance instruments to be exercised in the event that a bond fails to provide the promised returns.  Those insurance instruments are sold by large financial institutions.  Fifteen members of the ISDA voted unanimously to deem that the failure of Greek bonds is not a "credit event", and therefore the losses are not covered by the insurance which is in place, even though Greek bond holders stand to lose as much as 73% of their investments, and even though Standard & Poors have cut Greece's rating to "selective default".

There remains scope for the ISDA decision to be altered, as the financial agreements and obligations are very complex.  But at this stage, it appears that the arbiters of whether insurance is payable or not, are the insurers themselves, which would be a conflict of interest. 

Public acceptance of possible conflicts of interests such as this continues to erode confidence in the global financial system at the most fundamental level.  Finance is completely and ultimately based upon trust.  That trust appears to be being violated.

Click here to see the ISDA meeting resolution with the identities of the voters.

See the Financial Times' "No insurance pay-out on Greek debt", and Reuters "S&P downgrades Greece to selective default".

And for this blog's "Greek default will not be a default", of 22 January, 2012, with thanks and acknowledgement to JSMineset.

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