Derivatives dealers with exposure to Greek counterparties are evaluating their options in the event that Greece gives up the Euro, as the chances of a so-called “Grexit” from the EU continue to increase.
New elections were scheduled last week after Greek politicians failed to put together a coalition government. If Greece does end up leaving the single currency, derivatives traders doing business there may experience significant losses.
The crucial factor for banks trying to gauge their Greek exposure is the legal jurisdiction of their ISDA Master Agreements – the contract governing their swaps trades. Because the standard ISDA Master Agreement is subject to UK law, Greece will not be able to unilaterally re-denominate swaps trades governed by these agreements. Such an action would likely trigger a Termination Event that would close out the trade.
If the controlling document is not an ISDA Master Agreement but a Greek law contract, however, dealers will have a difficult time preventing heavy losses due to re-denomination.
It is estimated that most of the derivatives trading done with Greek counterparties is governed by the ISDA Master Agreement. Dealers with significant Greek exposure, however, would do well to consider the increasingly likely possibility of a Greek exit, and plan accordingly.