Credit Default Swaps: The Vanilla Essence
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Physical settlement fallback procedures
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
25.1 INTRODUCTION
As seen in the previous chapter, a buyer may continue to attempt delivery after the physical settlement date. In this connection, there are also various physical settlement fallback procedures that are contemplated under the architecture of the 2014 ISDA Credit Derivatives Definitions (henceforth the “2014 Definitions”; see International Swaps and Derivatives Association Inc. 2014b) which have been designed to enable a close-out of a transaction to occur where there has been a failure by a buyer to complete delivery by the physical settlement date. This chapter examines each of these physical settlement fallback procedures, the implications for a transaction where such procedures apply, and the timing as to when such procedures would become operative. In the concluding section, the 60 business day “Cap on Settlement”, which has the effect of truncating the physical settlement timeline and giving rise to a termination date in a transaction, is examined.
25.2 DELIVERY AFTER THE PHYSICAL SETTLEMENT DATE
In Chapter 24 (on Physical settlement), it was shown that the difficulties in meeting delivery deadlines can arise for a variety of reasons, and this can
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