On April 8, 2009, the International Swaps and Derivatives Association, Inc. (“ISDA”) announced the successful implementation of its 2009 ISDA Credit Derivatives Determinations Committees and Auction Settlement CDS Protocol (known as the “Big Bang Protocol”). Implementation of the Big Bang Protocol was the final step in the important industry initiative to incorporate (commonly referred to as “hardwire”) auction settlement terms into standard credit default swap (“CDS”) documentation. According to ISDA, over 2,000 parties signed up to the Big Bang Protocol, after an almost month-long period during which market participants could elect to adhere to its terms.

The Big Bang Protocol is, generally speaking, a way for market participants to apply the auction settlement and other provisions contained in ISDA’s 2009 March Supplement (the “Auction Supplement”) to the 2003 ISDA Credit Derivatives Definitions into existing CDS transactions by amending the terms of these transactions on a multilateral basis. The backbone of the Auction Supplement is the introduction of the concept of “Auction Settlement” as an available “Settlement Method” for standard CDS transactions, hence eliminating the need for the ad hoc, Credit Event-specific protocols and auctions that have been required to cash settle such transactions over the past few years. The Big Bang Protocol effectively amends the terms of relevant CDS transactions between sets of adhering parties such that the Settlement Method becomes Auction Settlement.

The Auction Supplement also incorporates the resolutions of regional Credit Derivatives Determinations Committees (the “Determinations Committees”) into the terms of standard CDS transactions. The Determinations Committees are to decide, among other things, whether a “Credit Event” has occurred (significantly, superseding the role of the Calculation Agent in this regard), whether an auction will be held in connection with that event and what obligations are deliverable for purposes of an auction. If a Determinations Committee agrees to deliberate a question and makes a determination on that question by the requisite majority, then the determination it makes is binding on parties having incorporated the terms of the Auction Supplement into their CDS transactions, either by the terms of their contracts or by their adherence to the Big Bang Protocol.

As discussed in greater detail in the linked memorandum, the auction settlement process and other changes introduced by the Auction Supplement and incorporated into existing CDS transactions by the Big Bang Protocol are intended to further standardize CDS transactions and to enhance the efficiency, liquidity and transparency of the CDS market. Full Text Client Alert.