Credit default swaps referencing Credit Suisse will transfer to UBS following the merger between the two banking giants, an industry body that oversees CDS markets has said.
In a widely expected ruling, the Credit Derivatives Determinations Committee voted unanimously on Friday that UBS is the sole successor for contracts linked to Credit Suisse. That decision, published on Monday, draws a line under months of uncertainty over the fate of Credit Suisse CDS.
It should also cement juicy profits for hedge funds betting on a convergence in CDS spreads between the two former rivals following the announcement of UBS’s emergency rescue of Credit Suisse in mid-March. The gap in five-year CDS between the two banks ballooned to more than 1,000bp on March 15 at the height of concerns over Credit Suisse, but had narrowed to below 20bp last week in the wake of the completion of the merger in mid-June.
The CDS committee, a panel of 12 banks and fund managers, held several meetings spread over more than a month to reach its decision. In the end, it voted 11 to zero in favour of a so-called succession event, with Credit Suisse abstaining from ruling on its own contracts.
The vote was the latest in a series of high-profile decisions on Credit Suisse CDS. The committee previously had to decide whether payouts to protection holders had been triggered around the time of the bank's emergency takeover after some hedge funds placed wagers that they had. Those attempts to trigger the contracts ultimately proved unsuccessful, but still managed to produce large swings in the CDS market.
The committee said that the process had begun to select new reference obligations for the merged UBS and Credit Suisse CDS contracts. “It is possible that some disruption could occur” in the meantime, the committee said, particularly in relation to central clearing and offsetting trades that originally referenced Credit Suisse.