Certain Definitions Relating to Credit Events - Credit Derivatives Provision

2014 ISDA Credit Derivatives Definitions A Jolly Contrarian owner’s manual™ 4.9 in a Nutshell™ The JC’s Nutshell™ summary of this term has moved uptown to the subscription-only ninja tier. For the cost of ½ a weekly 🍺 you can get it here. Sign up at Substack. 4.9 in all its glory 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. edit 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 Premium version of this page

Overview

edit

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.

Summary

edit

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.

Premium content

Here the free bit runs out. Subscribers click 👉 here. New readers sign up 👉 here and, for ½ a weekly 🍺 go full ninja about all these juicy topics 👇

• The JC’s famous Nutshell™ summary of this clause

edit

See also

edit

• Threshold Amount for Cross Default in the ISDA Master Agreement