Downgrade termination costs

Ratings-based (RB) additional termination event (ATE) clauses in International Swaps and Derivatives Association agreements can have a significant impact on the valuation of derivatives portfolios when rating events occur. Fabio Mercurio, Roberto Caccia and Massimo Cutuli explore this embedded optionality and its economic implications. A case study is provided to quantify the RB-ATE impact for a vanilla interest rate swap and a commodity option, and to analyse the sensitivity to ATE rating trigger levels


International Swaps and Derivatives Association agreements may contain additional termination event (ATE) clauses as part of section 5(b)(vi) of Isda (2002) (5(b)(v) in Isda, 1992), called ‘Events of default and termination events’. Typically, ratings-based (RB) ATE clauses give a counterparty the right to close out all derivatives contracts with a given financial institution (referred throughout as the bank) if the bank’s rating falls below a specified level above default, or, in some cases, is

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Credit risk & modelling – Special report 2021

This Risk special report provides an insight on the challenges facing banks in measuring and mitigating credit risk in the current environment, and the strategies they are deploying to adapt to a more stringent regulatory approach.

The wild world of credit models

The Covid-19 pandemic has induced a kind of schizophrenia in loan-loss models. When the pandemic hit, banks overprovisioned for credit losses on the assumption that the economy would head south. But when government stimulus packages put wads of cash in…

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