Credit Default Swaps: The Vanilla Essence
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A credit default swap snapshot
A credit default swap snapshot
Foreword
Preface
A credit default swap snapshot
Parties and key players
Documentation and standard trading conventions
Credit risk period, scheduled termination date and termination date
Fixed amounts, floating rate payer calculation amount and initial payment amount
Qualifying guarantee and qualifying affiliate guarantee
Reference obligation
Subordination and the senior non-preferred supplement
Outstanding principal balance and due and payable amount
Obligations and deliverable obligations
Credit event overview
Bankruptcy
Failure to pay
Repudiation/moratorium
Restructuring and redenomination
Governmental intervention and contingent convertible capital instruments
Successor determinations
Publicly available information and eligible information
Notices
Business day terms and timing rules
Event determination date and settlement methods
Auction settlement
Cash settlement
Physical settlement
Physical settlement fallback procedures
Orphaning
Fixed recovery transaction and reference obligation only trade
Novation and early termination
Economic sanctions: compliance challenges
Disclosures and regulations
Conclusion: at the ‘Exit Checkpoint’
Appendix
References
1.1 INTRODUCTION
We are at the starting point of our traveller’s expedition, looking for risks. The camera moves into position and it takes a snapshot. The expedition begins….
We begin with a snapshot of the mechanics of the credit default swap (CDS) product in accordance with the provisions of the 2014 ISDA Credit Derivatives Definitions (International Swaps and Derivatives Association Inc. (2014b), henceforth “the 2014 Definitions”), and an overview of the size and structure of the credit default swap market. In this connection, this chapter addresses the share of the credit default swap market in relation to the notional amount outstanding of the global over-the-counter (OTC) derivatives market based on data reported by the Bank for International Settlements (BIS), the International Swaps and Derivatives Association Inc. (ISDA), IHS Markit (now part of S&P Global) and the Depository Trust and Clearing Corporation (DTCC). In this chapter, the CDS market is also explored from the perspective of instrument, counterparty and sector types and credit index market activity, as well as transactions on actively traded reference entities that have traded notionals of US$15 million
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