On 19 September 2019, the FCA published an updated joint statement on opportunistic strategies in the credit derivatives market in cooperation with the US Securities and Exchange Commission and the US Commodity Futures Trading Commission.

The initial joint statement made in June 2019 outlined mutual concerns about the pursuit of such strategies and the adverse impact they may have on the integrity, confidence and reputation of the credit derivatives markets, as well as markets more generally. The strategies include manufactured credit events or narrowly tailored credit events.

The FCA welcomes the introduction of a recently released proposed protocol by the International Swaps and Derivatives Association (ISDA) designed to address certain issues relating to narrowly tailored credit events. The protocol contains two amendments to the 2014 ISDA Credit Derivatives Definitions:

  • an amendment to the Failure to Pay definition; and
  • an amendment to the Outstanding Principal Balance definition.

With regard to the proposed protocol, the FCA expects firms to consider how adherence to the protocol may help them mitigate risks to the market and their reputation. In addition, the FCA cautions firms to consider the risks to which they expose themselves by trading with counter-parties who do not adhere to the protocol. On a final note, the FCA warns that the proposed protocol will not address all the concerns identified in the joint statement such as strategies that do not involve narrowly tailored credit events.