Indra Rajaratnam


Having completed an examination of the key concepts that relate to a CDS transaction, in this part of the book our expedition moves on to explore four specific discussion topics that are integral to the trading of a CDS, beginning in this chapter with orphaning risk.

The chapter commences by describing what orphaning risk is and the events that magnify it. The concept of “frustration” within the context of a credit derivative transaction is further discussed, given the overlap between the events covered under the “no frustration provision” of the 2014 ISDA Credit Derivatives Definitions (henceforth the “2014 Definitions”; see International Swaps and Derivatives Association Inc. 2014b) and those that give rise to orphaning risk. The challenges in identifying and managing orphaning risk, including the impact of missed succession events, are also examined. In the concluding section, the correlation between the market’s perception of orphaning risk and the spread levels of a CDS transaction, including changes made to the constituents of a credit index as a result of diminishing liquidity in a traded reference entity, are highlighted.



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