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IACPM Releases Letter Calling for Standard Cancellability in LCDS Contracts

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  • IACPM Releases Letter Calling for Standard Cancellability in LCDS Contracts
11/21/2006

New York, NY –The International Association of Credit Portfolio Managers today released a letter calling for
the inclusion of standard cancellability provisions in LCDS contracts, or agreements involving credit default
swaps on loans. In its letter, the IACPM points out risk managers use LCDS to hedge specific obligations,
usually syndicated secured loans, and need to be able to cancel matching swaps contracts if the underlying
loans are called.
 
“The syndicated secured obligations that loan portfolio managers want to hedge are frequently repaid or
refinanced,” Som-lok Leung, executive director of the IACPM.  “Risk managers have to be able to cancel the
related swap or there will be a mismatch between the hedge and the underlying loan asset when it’s refinanced.
At the very least, that can increase overall hedging costs.”

The IACPM sent the letter to the International Swaps and Derivatives Association which has developed
standard documentation covering LCDS contracts in the United States and is expected to do the same in Europe.
IACPM is strongly encouraging ISDA to include cancellability language in the new European template and to modify
the existing US documentation to include a cancellability option which is currently missing from the US version.
The association points out a more favorable provision will encourage risk managers to use the product and help
the market grow.  “Our members, who include risk managers at very large banks, welcome the development of the
LCDS market because it can provide a powerful tool for managing and diversifying credit portfolios,” noted
Mr. Leung. “Further, to the extent that the market is currently characterized by a shortage of syndicated secured
loans, use of the LCDS product for hedging purposes by loan portfolio managers can provide an additional
supply of senior secured risk and boost market liquidity. “

The IACPM, with 73 member institutions located in twelve countries, is a professional
association dedicated to the advancement of credit portfolio management.