Credit Default Swaps: The Vanilla Essence
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Outstanding principal balance and due and payable amount
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
9.1 INTRODUCTION
This chapter examines the concepts of “outstanding principal balance” (OPB) and “due and payable amount” (DPA). The former applies to “borrowed money” obligations, while the latter applies to “non-borrowed money” obligations. The relevance of these terms in the context of the 2014 ISDA Credit Derivatives Definitions (henceforth the “2014 Definitions”; see International Swaps and Derivatives Association Inc. 2014b) and the three- and four-stage methodologies for determining the OPB are described in this chapter, together with examples from historical deliberations where the OPB of certain affected instruments was reduced to below par. The amendments to the calculation of the OPB where the 2019 Narrowly Tailored Credit Event Supplement to the 2014 ISDA Credit Derivatives Definitions (the “NTCE Supplement”)11 See International Swaps and Derivatives Association Inc. (2019c). is applicable to a transaction are also elaborated upon. These additional amendments have formed the standard trading convention for non-sovereign transaction types since January 27, 2020, as part of reforms implemented to address “narrowly tailored activity”. The chapter concludes with a brief
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