FACTBOX-Big Bang, Small Bang provisions for settling CDS

(Updates factbox published on Tuesday to include latest on Small Bang protocol, details of which are in the final process of negotiations)

June 10 (Reuters) - Europe's dealers and investors in credit default swaps must sign up next month to the so-called "Small Bang", a new system for settling payment under CDS contracts when a distressed company is forced to restructure.

This is an addition to the "Big Bang" protocol in April, which made changes globally to the cash auction settlement process for credit derivatives in the event of a default or bankruptcy. (For a related story, click on [ID:nL91041282])

Below are some of the main provisions of both the Small Bang and the Big Bang.

SMALL BANG

* A Determination Committee will rule whether there has been a restructuring credit event.

* CDS contracts may be grouped into eight possible buckets depending on maturity.

- zero to 2.5 years

- 5 years

- 7.5 years

- 10 years

- 12.5 years

- 15 years

- 20 years

- 30 years

* For each event, the Determination Committee will decide for which buckets to hold cash auctions to determine settlement prices as well as the bonds that will be deliverable into each bucket.

* After a credit event is determined, either buyers of protection or sellers of protection can decide whether to trigger their CDS contracts.

* If a CDS is triggered by the buyer of protection, it will go into one of the buckets depending on its maturity.

* If no auction is held for a particular maturity bucket, then the buyer has the option to roll down to the next shorter bucket or settle the trade by delivering a physical bond.

* If a CDS is triggered by the seller of protection, it will go into the 30-year, or cheapest-to-deliver, bucket.

* CDS that are not triggered for the auction will continue as before until there is another credit event or they mature.

* Investors with existing trades are being asked to sign the "Small Bang" protocol, which will voluntarily change their existing and new contracts to include the new settlement process.

* The International Swaps and Derivatives Association (ISDA) is expected to publish the terms of the protocol the week of June 15-19 on its website. www.isda.org

BIG BANG

* Regional credit derivatives determination committees are created to decide whether there has been a credit event, whether to hold an auction and the terms of each auction, including the bonds that will be deliverable.

- The committees include representatives from eight major dealers, two regional dealers, five buy-side investors, two non-voting dealers and one non-voting buyside investor.

- There is one committee each for: the Americas; Europe, the Middle East and Africa; Japan; Asia ex-Japan; and Australia and New Zealand.

- A member of ISDA must propose that the committee consider a potential credit event, with the sponsorship of a committee member.

* The effective date for CDS contracts that are eligible to be triggered by a credit event was changed from the business day following the trade date. Instead, it was moved to 60 days before the trade date for a credit event and 90 days before for a succession event.

That means that trades done under a new contract will have the same effective date as a trade one week before, which allows for them to be netted easily.

* The cash auction process, which has been instituted since 2005 and was previously done on a voluntary basis for each event, has been written into the legal documents for each CDS contract. (Reporting by Jane Baird; Editing by David Holmes and Will Waterman)