Credit Default Swaps: The Vanilla Essence
First published:
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Qualifying guarantee and qualifying affiliate guarantee
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
This chapter considers the types of guarantee obligations of a reference entity that can qualify as an Obligation, or a Deliverable Obligation. The chapter begins with a brief overview of a common guarantee structure and the terminology within the 2014 ISDA Credit Derivatives Definitions (henceforth the “2014 Definitions”; see International Swaps and Derivatives Association Inc. 2014b) that would be relevant to guarantees. The chapter explores the various guarantee descriptions, namely a “qualifying guarantee” and a “qualifying affiliate guarantee”, and describes the two-step determination process relevant to a qualifying guarantee. The first step of the determination process involves an assessment as to whether a guarantee complies with certain conditions, while the second step of the determination process requires the elimination of certain non-qualifying guarantees. The additional condition that needs to be met for a guarantee to form a qualifying affiliate guarantee is also examined. In the concluding section, the implications of a guarantee failing to constitute a “relevant guarantee”, and the principles applicable to the calculation of the outstanding principal balance of a
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