Credit Default Swaps: The Vanilla Essence
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Subordination and the senior non-preferred supplement
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
8.1 INTRODUCTION
This chapter explores the meaning of the term “subordination” and the method by which the “not-subordinated” characteristic is determined, including the implications of incorporating the 2020 Limited Recourse Additional Provisions (International Swaps and Derivatives Association Inc. 2020c), into the terms of a transaction. The chapter also examines the hierarchical fallback structure that may be applied to determine the benchmark obligation for use as the comparison obligation in any subordination analysis if there were no reference obligation and how the ranking of a transaction is determined. Towards the end of the chapter, the “Additional Provisions for Senior Non-Preferred Reference Obligations” (International Swaps and Derivatives Association Inc. 2017b; henceforth, the “Senior Non-Preferred Supplement”) to enable debt of a reference entity to be traded at three levels of seniority (including the “senior non-preferred level”) are evaluated.
8.2 THE RELEVANCE OF “SUBORDINATION”
“Subordination” is an important concept within the landscape of a CDS transaction, as it relevant to determinations relating to the “not-subordinated” characteristic. A change
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