Isda moves to clarify credit derivatives language

The International Swaps and Derivatives Association has moved to further clarify the definition of what constitutes a credit event in the credit derivatives business, in a new paper, 'Supplement relating to successor and credit events', published as a supplement to its 1999 credit derivatives definitions document.

The supplement attempts to remove much of the ambiguity from the original. For example, it revises the original document, which defines a ‘successor’ in the event of a merger or acquisition as an entity holding "all or substantially all of the obligations", with a numerical threshold. The new approach defines the ‘successor’ in the case of a merger or acquisition as an entity holding 75% or more of the bonds and loans of the original reference entity. The supplement outlines alternative approaches in the event that the 75% threshold is not met.

Isda has also sought to clarify what constitutes credit events such as a bankruptcy or insolvency. The supplement amends the language so that only an admission in a judicial, regulatory or administrative proceeding would constitute a credit event trigger. Statements made in other contexts are considered to be a less reliable indication of deterioration in credit quality.

The final issue relates to the ruling in the original document that stated that any change in the currency or composition of a payment of interest or principal is considered to be a credit event trigger. The supplement modifies this so that a change to a ‘permitted currency’ – the currency of a G7 country or a country that has a ‘AAA’ credit rating from a reputable rating agency – does not constitute a restructuring credit event.