Thomson SA to test new Europe CDS settlement rules
* Thomson first global bond restructuring credit event
* Thomson to test new ISDA "Small Bang" protocol
* Buyers of CDS protection may see lower payments
By Natalie Harrison
LONDON, Aug 13 (Reuters) - A credit event at France's Thomson SA (TMS.PA), the first to feature in a current benchmark European credit default swap index, will test the market's ability to cope with complex new auction rules to settle CDS.
The first hiccup came on Thursday as dealers switched to a new index that excluded Thomson CDS from the mostly "junk"-rated Crossover index ITEXO5Y=GF, which was the major contributor to a sudden 30 basis points jump tighter.
The next hurdle is likely to be a challenging auction process, credit strategists at Citigroup said in a note. "The timing is bad too, with a new protocol just released and a market under closer scrutiny than it has ever been," they said.
The European derivatives market introduced the "Small Bang" process last month for settling payments under CDS contracts after restructuring credit events. [ID:nLF217404]
A credit derivatives committee on Wednesday decided a waiver from Thomson's creditors in June to defer a $72.5 million principal payment on a 6.05 percent senior note due in 2009 was a restructuring credit event.
"This is the first restructuring event globally and the first real test of the 'Small Bang' protocol," said Tobias Sproehnle, director of indices at Markit, which owns the iTraxx indexes.
Up until now all global credit events have been either bankruptcies or were due to a "failure to pay", meaning the indexes have usually been traded with the defaulted credit until after the auction process, Sproehnle said.
In the case of a restructuring event, however, "Small Bang" rules require the credit to be spun off from the index immediately because of the optionality of the protection buyer or seller to trigger the CDS contract.
"If that procedure would not be followed the market could be left with thousands of index versions in case of multiple restructurings, which would be very difficult to handle especially when it comes to clearing," said Sproehnle.
Holders of the new version of the 44-name index excluding Thomson also have in addition a single-name CDS on Thomson, which they decide whether to trigger or not in the auction.
