Certain Definitions Relating to Credit Events - Credit Derivatives Provision

2014 ISDA Credit Derivatives Definitions A Jolly Contrarian owner’s manual™ Resources and navigation Resources (full wikitext) | (nutshell wikitext) | Anatomy | Narrowly-tailored credit event | Equity v credit derivatives showdown Index: Click ᐅ to expand: Credit Derivatives Section 4.9 in a Nutshell™ Use at your own risk, campers! Section 4.9 Certain Definitions Relating to Credit Events. (a) “Default Requirement” means the amount specified in the Confirmation or, if none, USD 10,000,000 (or in either case its Obligation Currency equivalent) at the date of the Credit Event. (b) “Governmental Authority” means a government or governmental, inter-governmental or supranational body, any central bank, financial markets regulator or resolution authority in each case having authority of supervisory powers over the Reference Entity and its business. (c) “Obligation Currency” means an Obligation’s currency. (d) “Payment Requirement” means the amount specified in the Confirmation or, if none, USD 1,000,000 (or in either case its Obligation Currency equivalent) at the date of the Credit Event. view template Full text of Section 4.9 Section 4.9 Certain Definitions Relating to Credit Events. (a) “Default Requirement” means the amount specified as such in the related Confirmation or its equivalent in the relevant Obligation Currency (or, if no such amount is specified, USD 10,000,000 or its equivalent in the relevant Obligation Currency) in either case, as of the occurrence of the relevant Credit Event. (b) “Governmental Authority” means: (i) any de facto or de jure government (or any agency, instrumentality, ministry or department thereof); (ii) any court, tribunal, administrative or other governmental, inter-governmental or supranational body; (iii) any authority or any other entity (private or public) either designated as a resolution authority or charged with the regulation or supervision of the financial markets (including a central bank) of the Reference Entity or some or of all of its obligations; or (iv) any other authority which is analogous to any of the entities specified in Sections 4.9(b)(i) to (iii). (c) “Obligation Currency” means the currency or currencies in which an Obligation is denominated. (d) “Payment Requirement” means the amount specified as such in the related Confirmation or its equivalent in the relevant Obligation Currency (or, if no such amount is specified, USD 1,000,000 or its equivalent in the relevant Obligation Currency) in either case as of the occurrence of the relevant Failure to Pay or Potential Failure to Pay, as applicable. view template Comments? Questions? Suggestions? Requests? Insults? We’d love to 📧 hear from you. Sign up for our newsletter.

Content and comparisons

Compare withe Cross Default’s “Threshold Amount” in the ISDA Master Agreement. That tends to be quite a lot higher than USD10mm, at least for banking institutions, and is often sheeted to a percentage — say 2 or 3% — of common equity.

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Summary

Workaday definitions needed for the Credit Events section to work properly. Since the point of the 2014 ISDA Credit Derivatives Definitions is to trigger catastrophic, Bankruptcy type events — but arguably trigger them “promptly” as soon as anything looking like it might make a goner of the Reference Entity happens — so you have Payment Requirement (the size of a due payment for a Failure to Pay — set by default at USD1m) and Default Requirement, being the total notional size of obligation you have defaulted on, where the actual failure may be less than the Failure to Pay threshold (and may not be a payment failure at all) — that defaults to USD10m.

Both feel kind of light to us in these modern days where you can be fined ten times that just for not managing your custody records properly, but here we are. You just have to remember to set the thresholds higher.

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General discussion

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See also

• Threshold Amount for Cross Default in the ISDA Master Agreement

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