The United States would have at least three days to make up for any missed debt payments before it triggered payments on its credit default swaps, according to trade association the International Swaps and Derivatives Association. If the United States does default, investors who sold protection in the form of credit default swaps would theoretically need to pay out around $4.77 billion to buyers, based on outstanding net volumes from the Depository Trust & Clearing Corp.
There has been some confusion, however, over how soon any default would trigger these payments as the country runs up against an August 2 deadline when the Treasury has warned it will run out of cash. The Treasury would have at least 3 days to cure any default, under CDS document rules, said Steven Kennedy, global head of communications at the association in New York.
"This grace period would apply if there was no grace period or if the grace period was less than 3 business days under the terms of the reference entity obligation," he said. The government may have more time if the Treasury bond documents specify a longer grace period. The cost of buying protection against a US default was stable on Tuesday at 57 basis points, a level that traders say reflects a still low probability the Treasury will fail to meet its debt obligations.
The price has inched up from around 50 basis points at the beginning of July, however, as nervousness around the issue increased. If the Treasury does skip a payment, the final decision on whether CDS payment are made will go to a US-based committee, ISDA said. This committee includes 10 dealers including Deutsche Bank, J.P. Morgan and Goldman Sachs, and five asset managers, including BlackRock, Citadel, and DE Shaw Group.