Credit Default Swaps: The Vanilla Essence
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Cash settlement
Cash settlement
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
23.1 INTRODUCTION
This chapter examines cash settlement under the terms of the 2014 ISDA Credit Derivatives Definitions (henceforth the “2014 Definitions”; see International Swaps and Derivatives Association Inc. 2014b). It begins by identifying the benefits and risks related to cash settlement and provides a description of the cash settlement mechanics. The chapter also discusses the process for determining the “final price” through the dealer poll valuation procedure as well as the factors that need to be considered when selecting a valuation date. Important concepts such as the valuation timing and methods, the type(s) of quotation, the quotation amount and methods are also discussed. The final section of the chapter elaborates the valuation procedure that applies in cases where the 2014 Definitions provide for a deemed cash settlement under the “Partial Cash Settlement Terms”, and the ‘Restricted Delivery Party Additional Provisions (International Swaps and Derivatives Association Inc. 2015; henceforth, the “Restricted Delivery Provisions”), which apply cash settlement to certain in-scope transactions. The chapter concludes with a brief discussion on the amendments that
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