Credit Default Swaps: The Vanilla Essence
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Bankruptcy
Bankruptcy
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
12.1 INTRODUCTION
This chapter seeks to provide an insight into the requirements of Section 4.2 of the 2014 ISDA Credit Derivatives Definitions (henceforth the “2014 Definitions”; see International Swaps and Derivatives Association Inc. 2014b) that deal with bankruptcy. First, events that led to a bankruptcy as a result of the impact of the Covid-19 pandemic, and some of the permanent UK insolvency law changes that were introduced under the UK Corporate Insolvency and Governance Act in 2020 (UK Government 2020) are considered. The drafting differences between the 2014 Definitions and the relevant Master Agreement are also discussed. Then, each of the component limbs under Sections 4.2(a)–(h) of the 2014 Definitions are examined in sequential order and, with respect to Section 4.2(d) of the 2014 Definitions, the drafting distinction between the definition of “bankruptcy” under the Updated 2003 Definitions and that in the 2014 Definitions is highlighted. Finally, a “similar relief” analysis of several historic deliberations is undertaken to illustrate the characteristics of certain reliefs that have been persuasive in the DC’s determination relating to a bankruptcy under Section 4
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