Credit derivatives—successors
Credit derivatives—successors

The following Banking & Finance guidance note provides comprehensive and up to date legal information covering:

  • Credit derivatives—successors
  • What are successors?
  • What are relevant obligations?
  • How is a successor determined?
  • Successor backstop date
  • Universal successor
  • Steps plan for corporate reference entities
  • Sovereign succession event
  • Documents required if a successor is identified

What are successors?

'Reference entity' is defined in Section 2.1 of the 2014 ISDA Credit Derivatives Definitions (the 2014 Definitions) as being the entity specified in the confirmation as well as any successor. A reference entity is key to the value of the credit derivative transaction (see What are credit derivatives?—What is a credit derivative? for a description of what a reference entity is) and so if this entity changes (by way of merger, takeover, etc), it can affect the value of that transaction as the creditworthiness of the new reference entity may not be the same as that of the original reference entity. If the new reference entity is weaker, the buyer of the transaction will benefit and if the new reference entity is stronger, the seller of the transaction will benefit. This can be seen as an unfair windfall to one of the parties and is why the issue of succession is addressed in the 2014 Definitions.

A Successor must be identified by the calculation agent or identified by the relevant ISDA Credit Derivatives Determinations Committee (the DC) (see Credit derivatives—settlement procedures—Auction settlement for more information on the DC) in accordance with the provisions of Section 2.2 of the 2014 Definitions.

The 2003 ISDA Credit Derivative Definitions had a concept of a 'succession event' but this concept