Credit Default Swaps: The Vanilla Essence
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Fixed recovery transaction and reference obligation only trade
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
27.1 INTRODUCTION
The second discussion topic concerns two product types that are contemplated under the terms of the 2014 ISDA Credit Derivatives Definitions (henceforth the “2014 Definitions”; see International Swaps and Derivatives Association Inc. 2014b): the fixed recovery transaction, and the reference obligation only trade. This chapter begins with a discussion on the nature of a fixed recovery transaction and describes the investor motivations for entering into such a transaction. The “Additional Provisions for Fixed Recovery CDS Transactions” (the “Fixed Recovery Provisions”), which set out a standardised framework for documenting a fixed recovery transaction, are also outlined. In this section, the salient provisions of the relevant provisions, including the changes made to the definition of “Cash Settlement Date” under the 2014 Definitions, are highlighted. The chapter then concludes with a brief overview of the key characteristics of a reference obligation only trade.
27.2 FIXED RECOVERY TRANSACTION
A fixed recovery transaction is a variant of the CDS, and is also referred to as a “binary” or “digital” swap. In this type of transaction, the recovery price or
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