Template:M gen Credit Derivatives 4.5

NTCE protocol

Narrowly-traded credit event, or NTCE, refers to a buried whoopsie in the 2014 ISDA Credit Derivative Definitions that reared its little button nose during a refinancing in 2017 by that scion of the New York Stock Exchange, Hovnanian Enterprises.

Hovnanian intentionally withheld a debt payment to an affiliate as part of a non-stressy refinancing. Though it was financially sound and able to make the payment, as a “Reference Entity” in the argot of the credit derivative definitions not doing so would technically constitute a Failure to Pay — a Credit Event, by any lights, although a false flag in the context of credit derivatives, which are meant to track credit deterioration.

This could trigger the unwind of credit protection, market disruption, panic on the streets and a slew of tedious silver circle client bulletins.

The answer was to build into the Failure to Pay definition the requirement for “credit deterioration”. This is what the 2019 Narrowly Tailored Credit Event Supplement to the 2014 ISDA Credit Derivatives Definitions, which can be retrofitted to older models by means of the ISDA 2019 NTCE Protocol, does. Implementation date expected to be 13 January 2020.