Derivatives committee to set up Russia CDS auction in light of OFAC license

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NEW YORK — The EMEA Credit Derivatives Determinations Committee (EMEA DC) said on Monday it was on track to hold an auction to settle Russian credit default swaps (CDS), after the U.S. Treasury last week green-lighted trades needed for such settlement.

Treasury’s Office of Foreign Assets Control (OFAC) on Friday issued a temporary waiver allowing the CDS settlement to continue.

The usual way to settle CDS – a derivative that works like an insurance against debt defaults – was thrown into chaos in June when Washington said its sanctions on Russia imposed a total ban on U.S. entities trading Moscow’s debt.

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But last week OFAC, which enforces U.S. sanctions, issued a license authorizing U.S. persons to purchase or receive Russian bonds in order to settle the CDS contracts.

Russia was declared in default last month, although failure to pay $1.9 million in interest back in May had already tripped the CDS trigger.

Russia has said it has means and will to pay, but sanctions that all but shut Moscow out of the international banking system, following Russia’s invasion of Ukraine in late February, have in some cases made the payments impossible.

The CDS committee, which includes banks and fund managers and is the bond market equivalent of an insurance payment arbiter, had postponed taking a decision on a potential auction after the default.

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However, it “continued to meet to prepare for holding an auction on the assumption that either a license would be issued by OFAC or the sanctions would otherwise be amended such that an Auction can be held,” it said in a statement on Monday.

No auction date has been set and the committee will meet again on Wednesday at 1300 GMT.

Monday’s meeting had been scheduled Thursday, before the OFAC license announcement.

The committee added that some Russian bonds issued into the country’s National Settlement Depository (NSD) — an entity hit by EU sanctions — may be excluded from the auction unless already accepted by securities settlement house Euroclear.

It is separately seeking investor feedback on whether to include certain bonds currently with Clearstream, another clearing house, which may still fall under sanctions.

If Clearstream issues are included, the committee said it would need “a novel solution not currently contemplated by market standard Auction Settlement Terms.” (Reporting by Rodrigo Campos and Davide Barbuscia; Editing by Leslie Adler and Sam Holmes)

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