Credit Default Swaps: The Vanilla Essence
First published:
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Preface
Preface
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
The famous line “Please, sir, I want some more” from Oliver Twist comes to mind when thinking of investors in the innovative financial markets that have an appetite for more credit risk, more leverage and more yield-enhancing opportunities. Just as, through metamorphosis, the caterpillar is transformed into a butterfly, through financial engineering, a single-name credit default swap (CDS) can transform into a multi-name credit derivative or a funded credit-linked note.
The single-name CDS is the “vanilla essence” of the credit derivatives market, and is the primary building block of many exotic credit products. But, as more leverage is built into a transaction, risk is invariably also compounded. This product, however, also constitutes a critical credit risk mitigation tool in its own right.
Although, in the past, structured credit products predominantly resonated with institutional investors due to their complexities requiring specialised financial knowledge, these products have since ignited interest from retail investors. This demographic of the investor base can now tap into investments in the CDS market through innovative exchange-traded funds that package credit
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