August 28, 2014

FAQs | ISDA Credit Derivatives Definitions 2014

As the countdown continues towards 22nd September— here are some notes on the new FAQ on the ISDA Credit Derivatives Definitions.

As the countdown continues towards 22nd September— the go-live date for the 2014 Credit Derivatives definitions— ISDA continues to publish and update explanatory materials surrounding the definitions. The latest update to the list of FAQs was published on August 21st.

The document contains 34 FAQs divided into two sections; General Questions and Operational Questions.

Rather than summarizing all 34 questions, I've highlighted questions (or aspects of questions) that I find particularly interesting:

  • The 2014 Definitions Won't Apply to Everything. As per question (7), the 2014 definitions will not apply to credit derivatives on loan-only transactions, US municipals and asset backed securities. Furthermore, the 2014 definitions will not apply to legacy credit derivative positions on a particular subset of corporate, sovereign and financial reference obligations (which ISDA has listed by name) traded prior to 22nd September.
  • Expect More Documents and Changes. As per question (3), on 22nd September four additional documents will be published by ISDA or Markit. They will address revisions to the terms and conditions of various credit derivatives contracts.
  • Doc Clause Codes Change to Reflect Economic Differences. The FAQ document dedicates two detailed paragraphs (questions (27) and (28)) to discussing the changes in the "doc clauses", or restructuring clauses, that are set to go into effect on 22nd September. The existing doc clause codes are to be appended with 14 (e.g. so that XR becomes XR14).  The FAQ document does not explain the economic and operational differences between the old and new doc clauses, so I have summarized them below:
    • Old Restructuring (CR): In the existing rules, parties to the CDS have the option to trigger an OR credit event by delivering a Credit Event Notice. In the 2014 definitions this optionality is removed, and an OR credit event is automatically triggered after being announced by the Determinations Committee.
    • Modified Restructuring (MR) and Modified Modified Restructuring (MMR): The 2009 CDS "Small Bang" introduced a number of complexities that resulted in a cumbersome post-credit-event workflow. The 2014 definitions introduce a number of simplifications to the small bang protocol.

A PDF copy of the August 21st FAQs for the 2014 Credit Derivatives Definitions and Standard Reference Obligations is attached at the bottom of this post.

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