Russian Swaps Auction May Proceed as U.S. Tweaks Sanctions Against Moscow

U.S. investors participating in credit-default-swap auctions are allowed to buy Russian sovereign debt, according to new guidance from the U.S. Treasury Department, potentially reducing losses for some investors who sold protection against a Russian default in the years leading up to the war in Ukraine, WSJ Pro Bankruptcy reported. The Credit Derivatives Determinations Committees, which oversees the credit-default-swap market, ruled the Kremlin was in default on its obligations to creditors in June after Moscow missed a small bond payment in April, but an auction to compensate investors who bought swap protection and potentially trade bonds for cash hasn’t occurred yet. That is because current U.S. sanctions don’t allow investors to buy Russian debt, although trading bonds is usually a key part of settling swap contracts after underlying borrowers default. In two licenses published by the Office of Foreign Assets Control of the Treasury Department on Friday, the U.S. authorized investor purchases of Russian sovereign debt for a period of 10 business days surrounding a swap settlement auction, and for financial institutions to clear and settle such transactions. “Without a [general license], CDS contracts would have to settle through fallback agreements or bilaterally,” a Treasury spokeswoman said in a statement. “This would have led to a great deal of uncertainty for the market.” Fallback agreements are provisions in swaps agreements that help investors conclude their contracts even if a settlement auction can’t proceed, and don’t always lead to fair-value outcomes for investors relative to actual market prices of the underlying borrower’s debt. Additionally, OFAC clarified that purchases of debt or equity of any Russian corporation are authorized until October in the event of a contract wind-down or settlement. Read more.