The International Swaps & Derivatives Association isplanning the biggest overhaul of the $24 trillion creditderivatives market since 2003.

New York-based ISDA is seeking feedback from market participantson a set of possible changes to the standards governingcredit-default swaps, including plans to ease settlement ofcontracts triggered by a sovereign debt exchange, according to MarkNew, the organization's assistant general counsel in theAmericas.

Greece's debt restructuring last year raised concern aboutpotential flaws in the insurance contracts. No time frame has beenset for changes to the market created by banks including JPMorganChase & Co., which will follow a 2009 revision of rules thatincluded new standards boosting transparency and confidence, Newsaid.

“This review is about looking back at the experience of the past10 years since the 2003 definitions were published and thinkingabout what have we learned in that time and what changes might needto be made,” New said in a phone interview. “The working group isvery much ongoing and considering a lot of differentproposals.”

One of the suggestions being considered would allow sovereigndefault swaps to be settled with packages of other assets in agovernment bond exchange. That would prevent distortions inpayouts, a concern after Greece undertook the biggestsovereign-debt restructuring in history.

Greek bondholders were forced to write off more than 100 billioneuros ($130 billion) of debt in return for new bonds worth 31.5percent of their original investment. The smooth settlement ofdefault-swaps was “a lucky break,” Michael Hampden-Turner, astrategist at Citigroup Inc. in London, said at the time.

ISDA is also seeking to ease the transfer of swaps contractswhen companies merge. Swaps pay the buyer face value in exchangefor the underlying securities or the cash equivalent should aborrower fail to adhere to its debt agreements.

The proposals don't address expropriation of debt by agovernment, the most recent test for the market. Investors areconcerned that settlement of swaps on SNS Reaal NV will bedistorted because the securities that could be delivered inexchange for compensation were seized by the Dutch state. ISDA saidyesterday it will publish an initial list of deliverableobligations after determining the nationalization constituted arestructuring credit event.

Bloomberg News

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