Credit Default Swaps: The Vanilla Essence
First published:
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Auction settlement
Auction settlement
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
22.1 INTRODUCTION
The expedition has now reached settlement of a transaction, and the exploration begins with the mechanics of the standard settlement method, namely auction settlement. The chapter begins by providing a background on the challenges relating to physical settlement which ultimately led to reforms that hardwired auction settlement as the standard settlement method for credit derivative transactions. It also introduces the architecture of the transaction auction settlement terms, and briefly describes the conditions that must be met for a transaction to fall within the scope of an auction as well as the mechanics of auction settlement. The circumstances that can lead to there being no auction, the events that give rise to the application of the fallback settlement method and the movement option (in the context of an “M(M)R Restructuring”) are also examined. The chapter concludes by describing the technology that underpins the two-stage auction final price determination process using the 2019 Thomas Cook Group plc Credit Derivatives Auction Settlement Terms (DC Administration Services (2019); henceforth “Thomas Cook Auction Terms”) as a practical illustration of an
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