Reference obligation

Indra Rajaratnam

7.1 INTRODUCTION

This chapter focuses on the role of a “reference obligation” in the context of a CDS transaction. It begins by exploring the importance of a reference obligation, and the risks associated with the use of a “nonstandard reference obligation”. The background to the development of the “standard reference obligation” (SRO) framework and the way in which the framework mitigates the risks connected with the use of a non-standard reference obligation are also examined. Then, a description of the term “reference obligation”, and the features of both an SRO and a non-standard reference obligation are elaborated. Recommended practices relating to the selection of a non-standard reference obligation are also briefly outlined and, at the end of the chapter, substitution events and the prescriptive rules relating to the substitute reference obligation selection process are examined.

7.2 THE IMPORTANCE OF THE REFERENCE OBLIGATION

A reference obligation is an important feature within the anatomy of the product. It constitutes an Obligation for the purposes of a trigger obligation in relation to a credit event. It also comprises a Deliverable Obligation for the purposes of

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