Credit-default swaps market leaders will meet this week in NewYork and London to discuss changes to the contracts in what may bethe biggest revisions since 2009, according to people familiar withthe situation.

Possible changes to standard contracts, which are governed bythe International Swaps and Derivatives Association, include howdebt-for-equity exchanges would be treated after a bankruptcy,specifying that credit swaps only cover losses from defaults thatoccur after their purchase, and clarifying how the date of aso-called credit event is determined, said the people, who askednot to be named because the discussions are private.

ISDA's credit steering committee is considering the changesafter Greece's debt restructuring posed the biggest test for the$26.5 trillion credit swaps market since banks including JPMorganChase & Co. created it more than a decade ago. ISDA, based inNew York, last overhauled the derivatives three years ago in theso-called Big Bang and Small Bang protocols that created a new setof standards to increase transparency and confidence in themarket.

The May 11 meeting of the credit steering committee will beginthe formal process of revamping the contracts by collectingproposed changes from the members, the people said. Any changesmust be approved by users of the existing contracts because thechanges will apply to those trades already executed, they said.More than 2,000 banks, hedge funds and other asset managers in thecredit-swaps market in 2009 agreed to adopt the 'Big Bang'protocol.

Fixing a Flaw

One possible change includes fixing a flaw in the contracts thatcan leave buyers with only part of their losses covered from asovereign debt restructuring, Steven Kennedy, an ISDA spokesman inNew York, said earlier this week.

Credit swaps payouts after a government debt exchange would betied to the ratio of the face value of the new bonds to the oldbonds. That would seek to prevent scenarios where payments arelimited to swaps buyers because the new bonds are trading close topar, a concern of market participants after Greece undertook thebiggest sovereign-debt restructuring in history. Credit swaps paythe buyer face value if a borrower fails to meet its obligations,less the value of the defaulted debt.

The restructuring change was the subject of a proposal byStanford professor Darrell Duffie and student Mohit Thukral in aMay 3 report.

“The proposal makes sense, and these very issues have, in fact,been under consideration by ISDA for some time,” Kennedy said in aMay 7 e-mailed statement. “It was initially raised as a formalquestion during the determinations-committee deliberations on theGreek credit event.”

Kennedy declined to comment on this week's meeting.

Another proposal the credit steering committee may consider ishow to deal with a company that undergoes a debt-for-equity swapafter a credit event has occurred, the people said. The concernarose in the bankruptcy of CIT Group Inc. when the commerciallender proposed to exchange its debt for equity before the creditswaps settlement date, one of the people said. Because only bondsand loans are deliverable under the current standard swapscontract, that left the possibility of having no debt with which tosettle the contracts.

The determinations committee, a group of 15 dealers and moneymanagers that govern the market, said in the CIT case that the debtthat could be swapped to equity was allowed to be delivered; theaim now is to codify that procedure in the contract rules, one ofthe people said.

Another possible change is adding language that makes it clearthat credit swaps bought after a credit event don't apply to pastdefaults, the people said.

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