Meet the bankers who decide whether Greece has defaulted

At Germany's insistence, any new European rescue plan will likely involve stiff losses for private holders of Greek debt, perhaps as much as 60 percent. Greece is insisting that any such "haircut" for bondholders be voluntary, but many see the losses as little more than a dressed-up default. And that in turn is turning the spotlight on an obscure committee of a little-known industry association whose job it is to determine whether countries have actually defaulted on their debt. 

There's plenty riding on whether losses incurred by bondholders can be described as voluntary and whether they constitute a default or restructuring. A formal finding that a Greece has defaulted on or restructured its debt--a "credit event," in the industry's parlance--would trigger credit default swaps, the risk-management instruments that played such a central role in the 2008 financial crisis. Senior European policymakers are reportedly spooked by the possibility of a replay. Via the Financial Times:

“You don’t need to be paranoid to be terrified,” said the person familiar with the talks. “They need to find a fine line where they don’t create a credit event but where the effect is significant enough so the [Greek] debt is sustainable over the long term.”

A senior German official said: “We are trying to avoid a credit event.”

Not everyone agrees that a Greek credit event would have disastrous consequences in this case. While the precise size of the CDS market for Greek debt isn't known, some observers argue that it's a very small percentage of Greece's overall debt load and that major banks are well prepared to pay on outstanding swaps.  Triggering CDS provisions could even have benefits by exposing existing swaps and mitigating uncertainty.

But assuming that there is a substantial danger of contagion from CDS activations, the question of whether the likely write-down of Greek debt constitutes a credit event looms large. So who exactly determines whether a credit event has occurred? Enter the International Swaps and Derivatives Association (ISDA).

The ISDA is comprised of banks and firms that buy and sell derivatives. Founded in 1985, it claims more than 800 members from 57 different countries. Like most industry associations, it does all manner of lobbying. But it also plays a quasi-regulatory role. It hosts several "determinations committees" (DCs) whose job it is to determine whether and when a credit event has occurred. The ISDA describes the process this way:

The process begins when a market participant puts a question to the DC for the relevant region. Any market participant (who need not be an ISDA member) with one or more CDS transactions can raise a question. A question is raised by submitting it, along with publicly-available information evidencing the event, using an online form on the ISDA website. After a question is submitted, it must be accepted by one of the members of the appropriate DC. This step is included in order to filter out frivolous questions. Once a question is accepted, the DC will meet within a defined timeframe to consider it. The DC will weigh the publicly-available evidence and vote on whether a Credit Event has occurred within the terms of the CDS Definitions.

It should be noted that the DC simply applies the Definitions to the public facts; it is not empowered to decide whether, as a matter of policy, a Credit Event should or should not occur in particular circumstances.

As soon as a vote has occurred, the determination is posted on the ISDA website. Each DC member’s vote is made public.

The ISDA website reports that the members of the determinations committee for Europe include most major banks that issue credit default swaps, including Bank of America/Merrill Lynch, Barclays, BNP Paribas, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase Bank, N.A., Morgan Stanley, Société Générale, and UBS. The committee also includes a smaller number of players active in buying CDS instruments.

While the ISDA insists that determinations are made solely on the merits, committee members face an array of competing pressures. Plenty of the banks that committee members represent have chunks of Greek and other European sovereign debt on their balance books.  But they also have complex financial, advisory, and regulatory relations with sovereign governments themselves, including Greece. One hedge fund manager told me that several banks represented on the committee are simultaneously advising Greece:

BNP, Deutsche Bank, and HSBC are all apparently serving an advisory role to the Greek Government.  BNP was recently visiting investors to try to 'persuade' them to take a haircut.  At the same time, everybody knows BNP has a seat on the determinations committee, and one wonders how independent that BNP representative is. 

Even leaving aside direct linkages to Greece, committee members have to consider the wishes of Europe's most powerful governments, which appear determined to avoid a credit event. If Europe does manage to assemble a new package for Greece that includes a haircut for bondholders, the ISDA's determinations committee will face some tough decisions--and more scrutiny than it is accustomed to receiving.

The Multilateralist

Was Qaddafi's killing a war crime?

It now appears very likely that Moammar Qaddafi was killed at the hands of his captors. Human rights groups are calling for an inquiry and the International Criminal Court has reportedly asked to examine  the former leader's body (it's not at all clear that the Libyan authorities will acquiesce to that request). The question that is already arising is whether Qaddafi's killing constituted a war crime that could be investigated by the ICC. The answer, in short: Yes, it was likely a war crime; and no, the ICC is not likely to prosecute anyone for it.

First, the question of whether Qaddafi's execution constitutes a war crime that falls under the ICC's jurisdiction. To be a war crime, there's got to be a war (or state of armed conflict). Here, there's no doubt that there was an armed conflict underway when Qaddafi was killed. Does killing a combatant who has surrendered constitute a crime? Quite clearly. The ICC statute includes in its list of war crimes the following:

Killing or wounding a combatant who, having laid down his arms or having no longer means of defence, has surrendered at discretion...

What's more, the ICC's jurisdiction over crimes committed in Libya extends to the actions of the NTC and anti-Qaddafi fighters  just as it does to Qaddafi's own men. The Security Council referred the "situation" in Libya to the court, not the particular behavior of one party or another. 

But the fact that the ICC would have jurisdiction over Qaddafi's killing does not answer the question of whether it's likely to investigate. The court has no obligation to prosecute all or even most of the crimes that fall under its jurisdiction. In fact, the ICC's governing statute clearly guides the prosecutor away from isolated acts toward large-scale behavior:

The Court shall have jurisdiction in respect of war crimes in particular when
committed as part of a plan or policy or as part of a large-scale commission of such
.  [my italics]

The choices of the prosecutor and the rulings of the ICC judges in recent years have made abundantly clear that the court prioritizes large-scale crimes that form part of a broad pattern or practice. Given that emphasis, it is unlikely the court will ultimately prosecute anyone for Qaddafi's killing unless they decide that there existed within the anti-Qaddafi forces a broad practice of war crimes or crimes against humanity and that the Qaddafi killing was a manifestation of that.

What's more, the new Libyan authorities could foil any ICC investigation by carrying out their own investigation. With  a national investigation underway, the ICC must yield unless it determines that the investigation is a sham. To the chagrin of many (mostly outside Libya, it seems), Qaddafi will never now see a courtroom in the Hague; neither will whoever killed him.

From the comments: Kevin Jon Heller, who knows as much about the ICC as anyone, believes an investigation into the killing is possible:

Although I share your skepticism that Gaddafi's executioner will ever face prosecution, I don't think the odds are quite as bad as you claim. Don't forget, although the Security Council's Darfur referral was directed at the actions of Bashir's government, not at rebel groups like JEM, Moreno-Ocampo nevertheless brought charges against rebel leaders for their alleged involvement in the murder of 12 Blue Helmets. That was an isolated act, yet Moreno-Ocampo had no hesitation in pursuing it. (And it's important to note, though it's implicit in your post, that the "plan or policy" element is not jurisdictional; it's little more than a suggestion.) Is it really inconceivable that Moreno-Ocampo would charge the murder of Gaddafi along with various crimes committed by the Gaddafi regime? After all, his rebelphilia is legendary...