Scheduled Termination Date
- This is the last day on which a credit event can occur.
- Fixed rate accrues to this date.
- It will be adjusted as per business-day convention.
Floating and Fixed-Rate Payer:
- The floating-rate payer is the protection seller (or risk buyer).
- The term floating is used to mean contingent.
- The fixed-rate is accrued up to and paid on the termination date.
- Semiannual is the market standard; quarterly reflects a lower rate.
- Any up-front fees must be accompanied by a “claw back” in case of an early termination.
- The market standard is to calculate from an initial price of “par.”
- The “reference price” is used when a credit event is imminent.
- The “highest bid” is most common and reflects the sale price of an equivalent cash asset.
- It is not usually necessary to name the dealers at the start of the deal. They can be agreed upon after a credit event.
- For illiquid reference assets, it is better not to use a dealer panel but to set the final price equal to “the price at which the reference asset is sold in the open market.”
- The market is trying to standardize around 20 days.
- A longer delay means a more settled market.
- The floating-rate payer (risk buyer) normally pays only the calculation amount against a general deliverability clause.
- The reference price and accrued interest are used if a credit event is imminent. In this case there will be a specific delivery clause.
- The market not very standardized here. Timing is usually 14 days.
- Another acceptable variation is the sum of face value plus accrued.
- The market standard is for any obligation to 10 years in a G-7 currency.
- Deliverables must be issued or guaranteed by the reference entity and bear interest.
- They can be bonds or loans but not LCs or discount instruments, unless the documentation is specifically changed.
Failure to Pay:
This is used in all deals. Note that such an event must be materially less favorable.
- This is used in all deals, and covers all “obligations” in which the missed payment is greater than the payment requirement.
- This is used in all non-sovereign deals.
- This is most common. Some deals use a similar term called “cross-acceleration” instead. One or the other is used in every deal.
- This covers all “obligations” in which the sum of the notional values is greater than the default requirement
- This is the actual amount of cash that has to be missed under “Failure to Pay.”
- It should realistically be less than the default requirement, but the market still uses $10 million quite often.
- This is the notional value of obligations that falls into cross-acceleration or cross-default. The market standard is $10 million.
- This is not directly related to deliverable obligations.
- These are the obligations that are monitored to see if a credit event occurs.
- The whole definition can be replaced by the “Reference Obligation” if the deal is to be linked to one asset only.
- Always include the operational center (London, New York and so forth) and the currency center.
- This usually reads as “modified following…”
- Often this is a joint agency between between the bank and the counterparty.
- Many dealers allow a professional market-maker to be the sole agent if required, but not a new counterparty.
- This does not have to match the calculation agent as defined in the ISDA master agreement.
Many dealers insist on having an ISDA master agreement in place before trading.
- A reference asset is only required:
- when there is cash settlement or materiality. In this case the asset must be liquid and widely traded.
- when the deliverable obligations are limited to one asset.
- Give the exact issuer name, and details of any guarantor.
- This is usually par, although other prices are applicable if materiality is used or if physical delivery is against a price other than par.
- The termination provision is only applicable for deals in which the reference asset is used to calculate materiality.