82,891
edits
Equity v credit derivatives showdown: Difference between revisions
no edit summary
Amwelladmin (talk | contribs) No edit summary Tags: Mobile edit Mobile web edit |
Amwelladmin (talk | contribs) No edit summary Tags: Mobile edit Mobile web edit |
||
| Line 54: | Line 54: | ||
Thus {{cddprov|Credit Events}} cross over with, but are different to {{isdaprov|Events of Default}}, and are more relentlessly focussed on non-payment in full and on time: {{cddprov|Bankruptcy}}, {{cddprov|Restructuring}}, {{cddprov|Repudiation/Moratorium}}, {{cddprov|Obligation Acceleration}}, {{cddprov|Governmental Intervention}}. | Thus {{cddprov|Credit Events}} cross over with, but are different to {{isdaprov|Events of Default}}, and are more relentlessly focussed on non-payment in full and on time: {{cddprov|Bankruptcy}}, {{cddprov|Restructuring}}, {{cddprov|Repudiation/Moratorium}}, {{cddprov|Obligation Acceleration}}, {{cddprov|Governmental Intervention}}. | ||
==Subordinated debt== | |||
The {{cddefs}} also deal with subordinated debt which only makes things more complicated, not less. Firstly, subordinated debt has many of the equity characteristics that make it much less debt like and insurable. It pays a lot more of its total return out in interest; over time the principal amount invested becomes of less and less significance. [[Credit Suisse]] [[AT1]]s, paying over 7% p.a., returned something like 45% of their original investment over 5 years, even though they were wiped entirely in April 2023. | |||
And speaking of [[AT1s]], since the [[global financial crisis]] bank capital structures have, by regulatory fiat, become a lot more complicated. Most G20 nations have enacted Bank recovery and resolution regimes, and while they’re broadly similar, outside the European Union, they are subtly different. And banks have reacted to them in idiosyncratic ways, too: there are multiple tiers common equity tier 1, alternative tier 1, alternative tier 2, and some old fashioned perpetual subordinated instruments which were crafted with no such fine distinctions in mind. And banks have opted different ways of bailing in: some convert to equity by design; some are written off. So generically providing for subordinated debt in a conmoditised, way is not straight, in the way plain old common equity, or senior unsecured, debt is. | |||
This makes determining credit events on these new instruments fraught, and litigationey. Dear old [[Lucky]] is, we dare say, going to be filling the coffers of our learned friends for some years yet. | |||
The {{cddprov|Designated Requirement}} — credit derivatives ’ answer to the {{isdaprov|Cross Default}} threshold — is typically a lot lower: if not specified, USD10m equivalent, where under Section 5(a)(iv) you might expect ten or a hundred times that, referenced to a percentage of shareholder equity. | |||
This reflects the different intentions of the provisions: one is to preserve one’s existing position in an ongoing trading arrangement should the counterparty be unable to pay what it owes, by allowing one to terminate and ''avoid'' loss; the other is to ''compensate'' for losses | |||