Credit Default Swaps: The Vanilla Essence
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Credit risk period, scheduled termination date and termination date
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
4.1 INTRODUCTION
This chapter first defines the credit risk period applicable to a transaction and clarifies the importance of such a period in the context of credit event settlements. The chapter then illustrates that settlement risk is still present after the expiry of the credit risk period. The concept and relevance of the scheduled termination date, and the events that give rise to a termination date are also described at the end of the chapter.
4.2 CREDIT RISK PERIOD
A DC credit event announcement and a credit event notice that needs to be delivered for a bilateral trigger of a credit event both relate to credit events which occur on or after the credit event backstop date, and on or prior to the extension date.11 See Sections 1.28 and 1.32 of the 2014 Definitions. Thus, these two dates are integral to the determination of the credit risk period for a particular transaction, and are depicted in Figure 4.1.
The credit risk period timeline demonstrated in Figure 4.1 reflects the window within which a credit event must occur for the event to form a credit event that could give rise to settlement under a transaction (the “credit risk period”). In this regard, the
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