Credit Default Swaps: The Vanilla Essence
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Physical settlement
Physical settlement
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
24.1 INTRODUCTION
This chapter focuses on physical settlement. It begins with the mechanics of physical settlement, and explains the cheapest-todeliver option. A recap of some of the relevant notices connected with physical settlement, as described in Chapter 19 (on Notices), is also provided. The discussions in this chapter also feature the asset package delivery framework, the constituents of an asset package and a description of asset package delivery and its implications on settlement of a transaction. Relevant to physical settlement, an overview of the provisions under the 2014 ISDA Credit Derivatives Definitions (henceforth the “2014 Definitions”; see International Swaps and Derivatives Association Inc. 2014b) in relation to effective delivery, the responsibilities of the parties in connection with settlement and the deemed representations that are provided by a buyer to a seller are also outlined. In conclusion, the practical issues that pose a barrier to physical settlement, as highlighted in Chapter 10 (on Obligations and deliverable obligations), are elaborated.
24.2 MECHANICS OF PHYSICAL SETTLEMENT
The settlement obligations of the parties to a transaction do
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