There is more than $1.2bn of CDS written on Noble’s debt, according to ISDA data © FT Montage

The plight of heavily indebted Noble Group is pitching some of the world’s biggest investment banks against each other in a tussle over credit default swaps written against the troubled commodity trader’s borrowings.

Goldman Sachs, Nomura and hedge funds who stand to gain from having bought CDS protection on Noble are facing off against JPMorgan, BNP Paribas and other traders. It is shaping up to be an important test for reforms made to the $10tn CDS market a decade after it was widely blamed for exacerbating the financial crisis.

The dispute rippled through debt markets in London and Asia last week after banks and funds served notice to sellers of CDS protection, which pays out in the event of a default. They claimed that a recent extension to Noble’s loan repayment terms amounted to a debt restructuring.

The move was unusual, as the CDS market has agreed since the financial crisis to rely on the rulings of the International Swaps and Derivatives Association (ISDA) to determine when a company is in default, seeking to avoid widespread confusion or drawn-out legal disputes.

But earlier this month the ISDA committee responsible for deciding on the status of Noble’s debt said it was unable to determine if the Singapore-listed commodity trader was in default or not, creating a vacuum that allowed bilateral claims to proliferate across the market. It is the first time ISDA has dismissed a question of default without making a ruling either way.

There is more than $1.2bn of CDS written on Noble’s debt, according to ISDA data, and banks and hedge funds often hold offsetting positions or hedges in the same products.

This meant that, after the first claim was filed early last week, it forced a chain reaction of claims and counterclaims that spiralled through the market, with one source saying 12 institutions had triggered notices of default. The net total owed by sellers of CDS protection on Noble could be up to $157m.

“Notices were flying all around the city,” said one hedge fund trader involved in the CDS market. “They wanted to be below the radar on this but the banks receiving the notices were obviously freaked out.”

JPMorgan and BNP Paribas, which are said by traders in the CDS market to stand to lose in the event of a Noble default, have now filed questions with ISDA to move the process back in front of the industry body’s so-called determinations committee, which will meet on Tuesday.

Goldman Sachs, Nomura, JPMorgan and BNP Paribas all declined to comment on their CDS positions. ISDA also declined to comment.

In the absence of a ruling from ISDA, banks and funds that have bought or sold Noble CDS are essentially flying blind, with no precedent to follow, except how the market operated pre-2009.

“It’s like the whole last 10 years of market development have been put to one side,” said Nigel Dickinson, a derivatives lawyer at Norton Rose Fulbright.

“Because the ISDA determinations committee mechanism was supposed to avoid problems like this — market participants would ideally not need to trigger credit protection bilaterally.”

ISDA introduced the determinations committee system eight years ago in response to the chaos that credit derivatives caused in the financial crisis, after the mass triggering of protection linked to subprime mortgage bonds had to be settled between financial institutions bilaterally at the peak of the crisis.

The $85bn bailout of AIG by the US government came after the insurer almost collapsed due to CDS exposure.

Noble was once Asia’s largest independent commodity trader but its large debt load and questions over its accounting have taken the Hong Kong-based company close to the edge. Despite embarking on a shrink-to-survive plan, its share price has fallen 95 per cent since early 2015 and it is on life support from its lenders.

The quarrel over Noble is the latest in a string of controversies in the CDS market.

The collapse of Spanish lender Banco Popular sparked a dispute over the payout on CDS due to a dispute over legal claims against the bank.

The ISDA determinations committee has also faced criticism for being made up of representatives of the same banks and investors that stand to lose or benefit from their decisions.

Going back to the old system of bilateral settlements, however, raises the prospect of more disputes and expensive court cases. Senior bank CDS traders say there is little appetite for a return and are looking for ISDA to make a call.

“The CDS market has made a lot of enhancements over the years,” said one person familiar with the business. “Moving to a determinations committee framework has definitely been a positive move.”

Get alerts on Noble Group Ltd when a new story is published

Copyright The Financial Times Limited 2019. All rights reserved.
Reuse this content (opens in new window)

Follow the topics in this article