Unformatted text preview: . ‘w‘w—m. can...m_m._w. .-_-..,.m..e.. , Credit Default Swaps A CBS is basically an insurance contract.
The contract has a national value which istypicelly $10 million. If you buy a CDS contract you must pay a quarterly premium to
the seller. CD5 contracts are standardized for a speciﬁc tenor (length).
Some short-term contracts less than lyear. Major tenor volume has been 5 years historically, but other
tenors are tradlng more frequently now - 1, Z, 3, 5, 7. 10 The most basic CD5 contract is for a single name, where there
is one underlying reference obligation. Credit Event As with an insurance contract, you keep paying until some
event happens then the seller must proulde protection. The event in the case ofa CBS is called a credit event. what exactly is a credit event has evolved over the years and
is a hotly contested issue these days. Missing a payment due to ﬁnancial distress is what the event
is meant to capture. Sometimes restructuring can cause a credit event which is not
due to ﬁnancial distress and no loss takes place. The deﬁnition has been modiﬁed a few times mostly for
restructuring reasons. ISDA Categorization (continued) El Credit Events The Resrrnciun‘ng Suppfemem to the 1999 ISDA Credit
Dcn'wiirve: Deﬁnitiom' (the “Supplemenlﬂeﬁnmon "J issued in
April 2001' provided a modiﬁed deﬁnition for restruuuring
There is n provision for the limitation on reference obligations in
connection with iceimcturmg of loans made by the proteciion
buyer to the borrower the: is the obligor ofﬂie refermoe
obligation This provision requires the following in order to
qualiﬁr for n remcmnng the! musrhe four or more holders ofihe reference obliginiou
there must be e consent toihe restructuring of ilic reference
obligation by a supemejorily (66 2/3%) In addition. die supplemeni limits the maturity of reference
Dhligalllnls that are physically deliverable when restructuring
results in a payoui mggered by the protection buyer. ...
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- Fall '10