Failure to Pay - Credit Derivatives Provision

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2014 ISDA Credit Derivatives Definitions
A Jolly Contrarian owner’s manual™

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section 4.5 in a Nutshell

Use at your own risk, campers!
Section 4.5. “Failure to Pay” means, after any Grace Periods that could apply have expired, the Reference Entity’s failure to make payment under any Obligations, totalling at least the Payment Requirement, as required by the terms of such Obligations.

Full text of section 4.5

Section 4.5 Failure to Pay. “Failure to Pay” means, after the expiration of any applicable Grace Period (after the satisfaction of any conditions precedent to the commencement of such Grace Period), the failure by the Reference Entity to make, when and where due, any payments in an aggregate amount of not less than the Payment Requirement under one or more Obligations, in accordance with the terms of such Obligations at the time of such failure.

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Content and comparisons

The obvious comparison is with Section 5(a)(i) of the ISDA Master Agreement, though a closer practical analogue is Cross Default. See also Potentioal Failure to Pay, which you might like to think would be the next provision, after Failure to Pay, or maybe the previous one, or at least with the other Credit Events in Article 4, but no, it its boundless wisdom ISDA’s crack drafting squad™ saw fit to bury it at Article 1.48. It’s fun, though. It makes the 2014 ISDA Credit Derivatives Definitions more like a treasure hunt.



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 Requirement 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.

General discussion

NTCE protocol

You may see reference to “narrow tailoring” when it comes to 2014 Credit Events. Being more of a relaxed fit, wide-wheelbase, high wide and (he likes to think) handsome type of chap, talk of skim fits and snake hipped tailoring makes the JC uneasy. But all in a good cause here.

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.[1]

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.


See also



  1. But nowhere near so tedious as their mountainous bulletins on regulatory margin. Enough already, guys!