The document discusses the launch and implementation of ISDA's "Big Bang Protocol", which aims to further standardize credit default swap (CDS) documentation and processes. Key aspects of the Protocol include establishing a Determinations Committee to make binding decisions on credit events, implementing auction settlement as the default method for settling CDS contracts, and incorporating backstop provisions for credit events and succession events. While implementation challenges exist, over 2,000 market participants have adopted the Protocol so far, supporting the continued drive toward standardization in CDS markets.

1. ISDA‟S BIG BANG PROTOCOL CONTINUES DRIVE TOWARD STANDARDIZATION –
AND REGULATION?
The drive toward standardization in the credit derivatives markets continues. In addition to
recent efforts to move OTC credit derivatives trades onto centralized clearing platforms, moves
are afoot in the market to standardize the way credit default swaps (“CDS”) are traded. These
trends perhaps soften the arguments – and may in fact define the framework – for a possibly
impending overlay of new regulation in the sector. Both compliance professionals and other
officers responsible for CDS trades in their organizations should become familiar with these
changes, as they will affect your organization‟s use of credit default swaps and the impact future
credit events and other events in the industry will have on your existing and future trades.
On March 12, 2009, the International Swaps and Derivatives Association (“ISDA”) launched its
2009 ISDA Credit Derivatives Determinations Committees and Auction Settlement Supplement
and Protocol, known as the “Big Bang” Protocol (the “Protocol”). ISDA characterized the
Protocol as the final stage of the process known as „hardwiring‟, or the incorporation of auction
settlement terms into standard CDS documentation. The Protocol became effective on April 8,
2009. The protocol generally covers corporate CDS, and does not apply to loan only
transactions, CDS on municipal bonds, or CDS on asset-backed securities, mortgage-backed
securities or collateralized debt obligations.
The text of the changes is contained in ISDA‟s March 2009 Supplement. Parties to credit default
swaps, both future and existing, may include the March 2009 Supplement in their CDS
documentation. The parties can also agree to modify the application of the March 2009
Supplement‟s provisions – although many market participants have expressed the view that they
expect the Protocol to become the new market standard.
The Protocol has implemented a number of significant changes, including the following.
The Use of Auction Settlement
Parties to a CDS contract can now select “auction settlement” as the method for settling a credit
default swap, rather than cash settlement or physical settlement. If the Determinations
Committee (discussed below) determines to hold an auction for a reference entity covered by that
CDS contract, the settlement will be governed by the results of that auction. The auction process
will be similar to the ad hoc credit derivatives settlement protocols that have been held on an ad
hoc basis in the past by ISDA. In a CDS auction, CDS dealers submit bids and offers to the
administrator of the auction, and those bids and offers are used to calculate the final price for the
reference obligation. Once the final price is determined, counterparties adhering to the Protocol
will settle their trades using cash settlement (rather than physical settlement) at the final price
determined in the auction. Should the auction fail to determine a final price, CDS trades
Copyright Christopher Lewis 2009

2. participating in the auction would settle with their originally named settlement method (i.e., cash
settlement according to the terms of the particular CDS trade, or physical settlement).
It should be noted that under the Protocol, cash settlement or physical settlement, rather than
auction settlement, can still be elected by the parties, although many market participants have
expressed the view that auction settlement under the Protocol will become the new market
standard.
The Appointment of a Determinations Committee
On March 31, 2009, ISDA announced the initial members of the Determinations Committee, the
names of which can be found at www.isda.org. Going forward, there will be one Determinations
Committee for each of the Americas, EMEA (Europe, the Middle East, and Africa), Australia
and New Zealand, Asia (excluding Japan), and Japan. Each Determinations Committee will seat
eight global dealers, two regional dealers from the related region, and five buy-side members.
Members of each Determinations Committee will rotate according to the rules set forth in the
rules of the Determinations Committee.
The Determinations Committee will decide issues relating to the CDS market, including:
• whether a credit event on any particular reference entity has occurred;
• the specific date as of which the credit event will be deemed to have been triggered
(which presumably would be the first date on which an ongoing event occurred);
• which obligations constitute deliverable obligations;
• whether an auction will be held to settle outstanding credit default swaps naming that
reference entity; and
• whether a succession event has occurred with respect to a reference entity and the
identity of any successor entity.
Parties adhering to the Protocol will be bound by the decisions of the Determinations Committee.
All determinations by the Determinations Committee of credit events and succession events must
be agreed upon by a supermajority of 80% of committee members, or if not so agreed, by an
external panel of experts selected by the Determination Committee.
To begin the process of determining whether a credit event in respect of a Reference Entity has
occurred, an adhering counterparty will request the related Determination Committee to consider
the issue, and at least one member of the applicable Determination Committee must agree.
Backstop Provisions
Additional terms of the Protocol include “backstop” dates for credit events and succession
events. This feature of the Protocol implements rolling look-back or retroactive periods for
Copyright Christopher Lewis 2009

3. credit events and succession events. The backstop date for credit events will be 60 days prior to
the date of the related determinations committee is convened to decide whether a credit event on
the related reference obligation or entity has occurred. The period is 90 days for a succession
event. Thus, if a credit event or succession event occurred more than 60 days or 90 days,
respectively, before the related determinations committee was asked to determine its existence,
the event will be considered stale and of no effect on existing CDS transactions.
New Market Practice – Standardization of Fees
In developing the Protocol, ISDA had considered including new standardized economic terms
(“Standard North American Corporate Terms”) in the Protocol, but instead opted to have these
terms will be incorporated into the Standard North American Corporate (“SNAC”) trade type on
DTCC and through the ISDA settlement matrix. The Standard North American Corporate Terms
include (a) trading CDS transactions with standard fixed payments of 100 basis points or 500
basis points for CDS trades on investment grade and high-yield bonds, respectively, with up-
front payments to reflect the pricing of different fixed payment rates, (b) standard quarterly
payment dates which match the four quarterly roll dates for the CDX indices, (c) the payment of
the full first coupon with no “stub” period, such that accruals of fixed amounts will begin on the
“roll” date immediately preceding the effective date of the CDS contract, with the initial
payment accounting for any fixed amount accrual prior to the trade date of the CDS contract, and
(d) the elimination of restructuring as a credit event for North American corporate CDS trades.
Parties will still be able to enter into North American corporate CDS trades on other economic
terms; however, they will not be able to use the SNAC trade type to confirm these trades. As
such, market participants have expressed the view that they expect the Standard North American
Corporate Terms to become the new market standard.
Implementation of the Big Bang Protocol – How is it Going?
On April 13, 2009, Derivatives Week reported that the Protocol had 2,086 adherents. Some have
expressed concern about implementation from an IT/Operations perspective, especially at times
when many institutions are cutting back on expenses. Notwithstanding these concerns,
implementation appears to have so far been successful, with ISDA recently announcing that the
Credit Derivatives Determinations Committee for the Americas held its first meeting,
determining that a credit event occurred for General Growth Properties, Inc. and Bowater
Incorporated. Standardization of CDS contracts is consistent with the recent move of CDS
contracts to central clearing exchanges, setting the stage for possible increased regulation. ISDA
has also recently reported that the level of electronic confirmations for credit derivatives rose
from 62 percent in 2007 to 92 percent in 2008; this trend is consistent with the standardization
and automation trend, which will allow both market participants and regulators to better monitor
and assess the credit derivatives markets.
Copyright Christopher Lewis 2009