CDS on Credit Suisse fails to trigger - again

2 min read
Christopher Whittall

Credit default swap contracts on Credit Suisse have failed to be triggered for the second time in less than a week, an industry body ruled on Monday, potentially drawing a line under 11th-hour efforts to force payouts to protection holders.

The Credit Derivatives Determinations Committee, a group of banks and investment funds that rules on CDS market matters, voted unanimously that a so-called bankruptcy credit event had not occurred for derivatives linked to Credit Suisse around the time of its emergency rescue by UBS.

The committee decided last week that a “government intervention” credit event had also not occurred on Credit Suisse’s subordinated CDS following the wipeout of SFr16bn (US$17.8bn) of the Swiss lender’s Additional Tier 1 debt in March as part of the UBS takeover. Hedge funds including Diameter Capital and FourSixThree Capital had loaded up on CDS that would pay out if the contracts were triggered.

Many CDS experts considered both questions to be long shots. But that didn't stop credit derivative markets from swinging sharply around the time of the first CDS question. Credit Suisse’s five-year subordinated CDS jumped as high as 378bp last week, according to S&P Global Market Intelligence, compared with under 250bp at the start of the month. That widening meant funds betting on a CDS trigger may still have been able to make money from the trade – provided they were able to cash out when spreads peaked.

The market reaction to the second CDS question was more muted, suggesting that traders doubted the chances of a trigger. Credit Suisse’s senior CDS spreads traded at 154bp on Monday, their lowest level since June.

Only 11 members of the CDS committee ruled on the two Credit Suisse questions, with the Swiss bank abstaining from voting on its own contracts. The low turnout has highlighted how under-staffed the normally 15-strong committee has become in recent years.

AllianceBernstein became the latest member to drop off the committee without being replaced following the departure of hedge fund Cyrus Capital Partners last year and Societe Generale in 2019. Some experts believe the committee’s rules may need to be rewritten to reflect its diminished membership.