Credit Default Swaps: The Vanilla Essence
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Novation and early termination
Novation and early termination
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
28.1 INTRODUCTION
The third discussion topic concentrates on novations and an early termination of a CDS. Section 7 of the relevant Master Agreement provides that the transfer of any interests or obligations under the Master Agreement may only be effected with the prior written consent of the other party. Such consent, however, would not be required where
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the transfer relates to any interest payable under the termination provisions of the relevant Master Agreement, or
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the relevant transfer is made pursuant to a consolidation, amalgamation or merger of all or substantially all of the assets of a party to another entity.
This chapter begins by exploring the motivations behind the decision of an investor to exit a transaction, and the challenges that can arise when effecting a transfer. The mechanisms for exiting a transaction, and the considerations that need to be taken into account when a transfer consent is requested, or when a party is approached to enter into a transaction, are also discussed. In the final section of the chapter, the terms that are relevant to an early termination provision, which is based on the valuation procedure under the relevant Master
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