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Equity v credit derivatives showdown: Difference between revisions
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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. | 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 | 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 already incurred under a reference instrument (yes, yes, it isn’t ''actually'' insurance and there is no requirement for an insurable loss, but still). | ||
The former position requires the company itself to be done for; if it isn’t, you still have the prospect of full recovery; the latter position is concerned only with the market value of that specific instrument. If it is canned, rescheduled, or defaulted upon such that the original bargain it promised is no longer to be had, then the CDS pays out even if the Reference Entity remains a going concern and chunters happily along back towards insolvency. (If its CDS is triggered that becomes vanishingly unlikely of course, but if there is one thing the market tells everyone, it is YOU NEVER KNOW.) | |||