Credit Default Swaps: The Vanilla Essence
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Reference obligation
Reference obligation
Foreword
Preface
A credit default swap snapshot
Parties and key players
Documentation and standard trading conventions
Credit risk period, scheduled termination date and termination date
Fixed amounts, floating rate payer calculation amount and initial payment amount
Qualifying guarantee and qualifying affiliate guarantee
Reference obligation
Subordination and the senior non-preferred supplement
Outstanding principal balance and due and payable amount
Obligations and deliverable obligations
Credit event overview
Bankruptcy
Failure to pay
Repudiation/moratorium
Restructuring and redenomination
Governmental intervention and contingent convertible capital instruments
Successor determinations
Publicly available information and eligible information
Notices
Business day terms and timing rules
Event determination date and settlement methods
Auction settlement
Cash settlement
Physical settlement
Physical settlement fallback procedures
Orphaning
Fixed recovery transaction and reference obligation only trade
Novation and early termination
Economic sanctions: compliance challenges
Disclosures and regulations
Conclusion: at the ‘Exit Checkpoint’
Appendix
References
7.1 INTRODUCTION
This chapter focuses on the role of a “reference obligation” in the context of a CDS transaction. It begins by exploring the importance of a reference obligation, and the risks associated with the use of a “nonstandard reference obligation”. The background to the development of the “standard reference obligation” (SRO) framework and the way in which the framework mitigates the risks connected with the use of a non-standard reference obligation are also examined. Then, a description of the term “reference obligation”, and the features of both an SRO and a non-standard reference obligation are elaborated. Recommended practices relating to the selection of a non-standard reference obligation are also briefly outlined and, at the end of the chapter, substitution events and the prescriptive rules relating to the substitute reference obligation selection process are examined.
7.2 THE IMPORTANCE OF THE REFERENCE OBLIGATION
A reference obligation is an important feature within the anatomy of the product. It constitutes an Obligation for the purposes of a trigger obligation in relation to a credit event. It also comprises a Deliverable Obligation for the purposes
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