An illiquid corner of swaps insuring Credit Suisse Group AG debt has surged back to life as some hedge funds make the case they should be triggered.

Funds including FourSixThree Capital and Diameter Capital Partners have been buying swaps insuring Credit Suisse’s subordinated bonds with the idea that the controversial writedown of the firm’s AT1 securities qualifies as a trigger for them, according to people familiar with the matter. Law firm Kramer Levin is helping with efforts to make a case for a triggering event, said the people, asking not to be identified describing private talks.

The swaps this week had their biggest increase since UBS Group AG agreed to buy Credit Suisse in an emergency weekend deal in March. As part of that acquisition, Swiss regulators forced the wipeout of about $17 billion of so-called Additional Tier 1 notes. The swaps have jumped 85 basis points this week to 360 basis points, indicating there’s a chance of about 20% that the bonds will default over the next five years, according to CMAI data.

Typically, market participants who believe that there’s been a breach of terms in the bonds will submit a question to the Credit Derivatives Determinations Committee in an attempt to trigger an insurance payout. The committee’s website showed no such submissions as of 8.30 p.m. Wednesday in New York.

Traders at JPMorgan Chase & Co. have held discussions with buyside clients over the possibility of a trigger, fueling some trading in the swaps this week, separate people briefed on the matter said. The JPMorgan traders were presenting the argument as one that some hedge funds are making rather than the bank’s view, the people said.

Many investors in the AT1 bonds have separately brought legal challenges against the writedown decision, which regulators have argued was justified because the rescue deal involved state support.

Representatives for FourSixThree, Diameter, and JPMorgan declined to comment. A spokesperson for Kramer Levin didn’t respond to requests for comment.

--With assistance from Alastair Marsh.

Author: Laura Benitez, Erin Hudson and Luca Casiraghi