Credit Default Swaps: The Vanilla Essence
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Failure to pay
Failure to pay
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
13.1 INTRODUCTION
This chapter focuses on a failure to pay. It begins with an outline of the conditions applicable to a failure to pay and highlights some delayed payment and opportunistic strategies that have been widely reported in the news and that have precipitated calls for reform to the product terms to address “narrowly tailored activity”. These reforms have led to the establishment of a new condition with respect to a failure to pay in relation to non-sovereign reference entities, namely the “credit deterioration requirement”. This requirement has been enshrined in a new supplement, namely the “2019 Narrowly Tailored Credit Event Supplement to the 2014 ISDA Credit Derivatives Definitions” published by ISDA (International Swaps and Derivatives Association Inc. 2019c; henceforth, the “NTCE Supplement”). This supplement and the related “Interpretative Guidance” contained in it to assist in determinations concerning satisfaction of the “credit deterioration requirement” are also analysed. A narrowly tailored case study has been incorporated in the relevant section to provide a practical demonstration of the operation of the Interpretive Guidance. The chapter then concludes
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