New Credit Default Swap Terms To Be Implemented In September 2014

Earlier this year, the International Swaps and Derivatives Association Inc. (ISDA) published the 2014 Credit Derivatives Definitions (the 2014 Definitions). The 2014 Definitions introduce a new government bail-in Credit Event trigger for credit default swap (CDS) contracts on financial Reference Entities in non-U.S. jurisdictions and also modify the typical terms of sovereign CDS contracts in light of the Greek debt crisis, by allowing a buyer of protection to deliver upon settlement the assets into which the Reference Obligation has converted even if such assets are not otherwise deliverable. Further, they create a concept of a Standard Reference Obligation, which means that most CDS contracts on a given Reference Entity would have the same Reference Obligation, thereby increasing the fungibility of such CDS contracts.

Much like the predecessor 2003 ISDA Credit Derivative Definitions (the 2003 Definitions), which they are intended to supersede, the 2014 Definitions provide the basic legal framework for certain credit derivative transactions and, among other things, provide standard provisions that may not otherwise be specified by parties in a confirmation. As with other product-specific definitions, parties may elect to modify or supplement the standard terms set forth within the 2014 Definitions.

It is anticipated that market participants will begin to use the 2014 Definitions with the September 2014 credit default index swap roll date (i.e., September 22, 2014). The 2014 Definitions will apply to new trades only if so elected by the parties (e.g., by incorporating their terms into a trade confirm). Additionally, ISDA is working on a draft protocol (anticipated to be released in August and to be open until a date in September that is on or near the roll date) that parties can use to elect to have the 2014 Definitions apply to existing trades, although certain existing transactions such as sovereign CDS and CDS on European financial entities are expected to be excluded from the protocol given the substantial impact the changes could have on such trades' terms and value.

Market participants who trade in CDS contracts will want to understand and assess the 2014 Definitions in advance of the anticipated September 2014 implementation date and determine whether they are comfortable with the new terms or will want to amend any provisions for their CDS trades.

Key Changes Implemented With the 2014 Definitions

New CDS Credit Event Triggered by...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT