Financial CDS were in focus on Monday amid news that a change in International Swaps and Derivatives Association documentation could affect the liquidity of current subordinated contracts.

Isda is known to be looking at amending CDS definitions in light of recent events, particularly the SNS Reaal nationalisation earlier this year and the possibility of "bail-ins" of bank bondholders under a new European regime.

The SNS case was unusual in that there was no subordinated debt left to deliver into the CDS contract - it has been appropriated by the government and written down to zero. Senior debt was available, but clearly wasn't an accurate representation of subordinated credit risk.

Isda is consulting on the deliverability issue, with proposals on this and a new credit event for bank bail-ins possibly coming in before the end of the year, according to the latest reports.

But there are question marks over whether the new definitions - if and when they are implemented - will apply to legacy trades. If not, the current contracts could become less valuable than new deals and therefore less liquid.

This concern probably contributed to the compression in the Markit iTraxx Senior Financials and Subordinated indices today. The latter index tightened by 17bps to 182.5bps, meaning that the multiple to the senior index is now 1.41. It has only been lower than this on one occasion, and that was in August 2007.

The fact that senior bondholders are also liable to be bailed-in post-Cyprus may also be contributing to the compression in the indices. Single names were also affected. Monte dei Paschi, for example, saw its subordinated CDS tighten by a massive 76bps to 890bps, while its senior spreads rallied by just 11bps to 565bps.

In the broader market, the Markit iTraxx Europe and CDX.NA.IG indices were hovering around 90bps and 70bps, respectively. Central banks will continue to drive spread direction this week, with Ben Bernanke's testimony before Congress the probable highlight.

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