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2014 ISDA Credit Derivatives Definitions
A Jolly Contrarian owner’s manual™
4.2 in a Nutshell™
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Section 4.2 Bankruptcy. “ Bankruptcy” means the Reference Entity
(a) is dissolved (other than pursuant to a consolidation, amalgamation or merger),
(b) becomes insolvent or is unable to pay its debts or fails or admits in writing in a judicial, regulatory or administrative proceeding or filing its inability generally to pay its debts as they become due,
(c) makes a general assignment, arrangement, scheme or composition with or for the benefit of its creditors generally, or such a general assignment, arrangement, scheme or composition becomes effective,
(d) institutes or has instituted against it a proceeding seeking a judgment of insolvency or bankruptcy or any other similar relief under any bankruptcy or insolvency law or other law affecting creditors’ rights, or a petition is presented for its winding-up or liquidation, and, in the case of any such proceeding or petition instituted or presented against it, such proceeding or petition (i) results in a judgment of insolvency or bankruptcy or the entry of an order for relief or the making of an order for its winding-up or liquidation, or (ii) is not dismissed, discharged, stayed or restrained in each case within thirty calendar days of the institution or presentation thereof,
(e) has a resolution passed for its winding-up or liquidation (other than pursuant to a consolidation, amalgamation or merger),
(f) seeks or becomes subject to the appointment of an administrator, provisional liquidator, conservator, receiver, trustee, custodian or other similar official for it or for all or substantially all its assets,
(g) has a secured party take possession of all or substantially all its assets or has a distress, execution, attachment, sequestration or other legal process levied, enforced or sued on or against all or substantially all its assets and such secured party maintains possession, or any such process is not dismissed, discharged, stayed or restrained, in each case within thirty calendar days thereafter, or
(h) causes or is subject to any event with respect to it which, under the applicable laws of any jurisdiction, has an analogous effect to any of the events specified in Sections 4.2(a) to (g).
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Overview
Compare with the Bankruptcy definition from the ISDA Master Agreement. You’d like to think they track each other closely and the good news is, per this comparison, they do. Chapeau, ISDA’s crack drafting squad™.
Summary
Differences with Section 5(a)(vii):
- Doesn’t cover Credit Support Providers or Specified Entities (being a specific type of credit mitigant to a private OTC bilateral trading agreement, like an ISDA Master Agreement which, being a private contract is not naturally the kind of thing that triggers credit derivatives) nor guarantors (except where the Reference Entity is itself the guarantor). A CDS being, per the Potts opinion, a derivative of the credit risk of a specific entity in which the Buyer has no necessary “insurable interest”, rather than a specific cover for the repayment of a specific debt obligation, the credit worthiness of guarantors, credit support providers and so on doesn’t come into it.
- Simplified provision (d) which is less bothered about who institutes the proceedings, and less particular about the types of formal insolvency process one can go through, so is a bit more “fair large and liberal”.
- No catch-all “or takes any steps in furtherance of the above” rider at the end to sweep up a loss of nerve or weirdo jurisdictions.
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See also
References