Preparing for the new 2014 credit derivative definitions

Preparing for the new 2014 credit derivative definitions

ISDA's 2014 credit derivatives definitions will enter into force on 22 September 2014. Nigel Dickinson, partner in the capital markets team at Norton Rose Fulbright LLP considers the main changes and what lawyers can do to best prepare for the changes.

A new standard reference obligation allowing for the adoption of a standardised reference obligation across credit default swap (CDS) contracts is among the new terms introduced in revised credit derivatives definitions published by the International Swaps and Derivatives Association (ISDA). The new definitions will be implemented on the September 2014 CDS roll date, but will only apply if parties reference them in their trade documentation for new trades or agree to amend the documentation for existing transactions through the use of a protocol.

What are the main changes from the old definitions?

The 2014 definitions introduce a number of new concepts, including:

  • a new credit event for CDS transactions on financial reference entities, triggered by a govern-ment-initiated bail-in
  • a provision for delivery of the proceeds of bailed-in debt or a restructured reference obligation, and more delineation between senior and subordinated CDS transactions on financial reference entities
  • the ability to settle a credit event in a CDS transaction on a sovereign reference entity by deliv-ery of assets into which sovereign debt is converted, and
  • the adoption of a standardised reference obligation across all market-standard CDS contracts on the same reference entity and seniority level

Further details are available on ISDA's website. ISDA has also published a protocol relating to the 2014 definitions, which will allow parties to incorporate the terms of the 2014 definitions into their existing CDS transactions (and for a certain period of time, new CDS transactions) by adhering to such protocol (the protocol).

How have the changes been received by the market?

Trading on the 2014 definitions is scheduled to begin on 22 September 2014 (the next iTraxx roll date) and from then onwards the credit derivatives market will move to trading on the 2014 definitions as the new mar-ket standard. Participants will be able to upgrade their existing CDS on the old definitions to the 2014 defini-tions in advance of 22 September 2014 by adhering to the protocol, subject to carve-outs for CDS referenc-ing European financials, global sovereigns and certain corporates trading on guarantees which would fail as qualifying guarante under the

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