The end of narrowly tailored credit events?

The end of narrowly tailored credit events?

Colin Rice, partner and head of the Asian derivatives & structured products team at Norton Rose Fulbright, discusses International Swaps and Derivatives Association’s (ISDA’s) recently published 2019 Narrowly Tailored Credit Event Supplement to the 2014 ISDA Credit Derivatives Definitions.

On 15 July 2019 ISDA published the 2019 NTCE Supplement to the 2014 ISDA Credit Derivatives Definitions (2014 Definitions) following consultation with market participants to address issues with narrowly tailored credit events (NTCE Supplement). The NTCE Supplement is intended to be applied by market participants to new credit default swap (CDS) contracts and also incorporated into existing CDS contracts by adherence by market participants to the ISDA 2019 NTCE Protocol published on 27 August 2019.

What issues are ISDA trying to address in the NTCE Supplement?

Concerns have been raised by market participants, the ISDA board of directors and the Commodity Futures Trading Commission in relation to narrowly tailored credit events, being certain arrangements with corporations that appeared to involve intentional or ‘manufactured’ failure to pay credit events leading to settlement of CDS contracts but with minimal impact on the corporation (Narrowly Tailored Credit Events). The 2019 NTCE Supplement is intended to restore confidence in the efficiency, reliability and fairness of the CDS market.

The 2019 NTCE Supplement also seeks to address market concerns in relation to potential distortions to the value of physical settlement created by obligations issued at a discount being used for physical settlement. 

What amendments does the NTCE Supplement make to the 2014 Definitions to deal with Narrowly Tailored Credit Events?

The nature of Narrowly Tailored Credit Events means that it is not possible to devise an exhaustive definition that would capture all such arrangements so the NTCE Supplement instead focuses on the common feature that distinguishes Narrowly Tailored Credit Events from normal payment defaults which is that they do not result from, or in, the deterioration in creditworthiness or financial condition of the reference entity.

The NTCE Supplement amends the ‘Failure to Pay’ credit event to

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About the author:

Meet Emma:

1.Banking and finance lawyer with experience in derivatives, debt capital markets, securitisation and structured finance in London and Paris

2.Likes ballet, playing the harp and holidays

3.Thinks the law is always changing!

Emma trained and qualified at Allen & Overy LLP and worked in their derivatives and structured finance teams in London and Paris.  She then joined the foreign exchange prime brokerage legal team at Deutsche Bank before spending 4 ½ years with Crédit Agricole CIB advising the fixed income and derivatives desk.