Template:M summ Credit Derivatives 4.5

Note the contraction in scope brought about by the narrowly-tailored credit event annex.

Differences with Section 5(a)(i)

• Threshold: There is a Payment Obligation meaning that the payment has to exceed a threshold. Presumably one indicative of the Reference Entity’s general financial parlousness, but the parties are free to set it where they like. In this regard redolent of Cross Default.
• Agregation: Also like Cross Default, it contemplates an aggregation of multiple failures perhaps under several Obligations. Depending on how constrained your Obligations are — usually more so than Specified Indebtedness, which is usually borrowed money and may even be (unwisely, but still) widened from that.
• No acceleration required : Also, like Cross Default but for different reasons, the holders of the obligation need not have formally accelerated it. What matters is not the state of the indebtedness, but its market value should one try to liquidate it in the secondary market. One can have all kinds of practical, commercial and even accounting reasons for not accelerating the moment a payment is missed, but if the failure is public, it will instantly be reflected in the market value of Reference Entity’s public debt obligations, which is the contingency one tries to protect against with credit derivatives.