Fixed amounts, floating rate payer calculation amount and initial payment amount

Indra Rajaratnam

5.1 INTRODUCTION

This chapter focuses on the premium (also known as the “fixed amount”) paid by a buyer to a seller for the assumption of credit risk in relation to a transaction, and defines the “fixed amounts”, the “floating rate payer calculation amount” and the “initial payment amount”. It begins with a brief discussion on the default swap basis that arises between the CDS spread level with respect to a particular reference entity and the spread level on obligations issued by the relevant reference entity in the cash market. The “fixed amount” terms that apply to a “Standard” transaction type, the component inputs in the calculation of a fixed amount and rebates that may apply to a transaction are also outlined. Throughout the discussions in this chapter, examples of a “portfolio structure” are given to illustrate the relevant fixed amount provisions under the terms of the 2014 ISDA Credit Derivatives Definitions (henceforth the “2014 Definitions”; see International Swaps and Derivatives Association Inc. 2014b) that would need to be amended for such structures. An understanding of the operation of the fixed amount provisions within such a structure can provide useful