How to Access and Use the 1999 ISDA Credit Derivatives Definitions for Your Credit Derivative Transactions
Introduction
Credit derivatives are financial contracts that allow investors to transfer or hedge the credit risk of an underlying entity or asset. For example, a credit default swap (CDS) is a type of credit derivative that allows one party (the buyer) to pay a periodic fee to another party (the seller) in exchange for receiving a payment if a specified credit event (such as default or bankruptcy) occurs on a reference entity (such as a corporation or a sovereign).
1999 Isda Credit Derivatives Definitions Pdf Download
However, credit derivatives are not standardized products that trade on exchanges. They are privately negotiated contracts that can vary in terms of their terms and conditions. Therefore, they need clear and consistent definitions to avoid ambiguity and disputes between the parties. This is where the ISDA Credit Derivatives Definitions come in.
The International Swaps and Derivatives Association (ISDA) is a global trade association that represents participants in the over-the-counter (OTC) derivatives market. ISDA publishes various definitions, master agreements, protocols and supplements that provide a common framework for documenting OTC derivatives transactions. One of these publications is the ISDA Credit Derivatives Definitions, which define the key terms and concepts used in credit derivative contracts.
The first version of the ISDA Credit Derivatives Definitions was published in 1998, but it was soon replaced by a more comprehensive and revised version in 1999. The 1999 ISDA Credit Derivatives Definitions (the "1999 Definitions") are intended for use in confirmations of individual transactions governed by agreements such as the 1992 ISDA Master Agreements published by ISDA. The 1999 Definitions provide the basic framework for the documentation of privately negotiated credit derivative transactions.
In this article, we will explain what are the 1999 Definitions, how they work, how to use them in practice, and how to download them in PDF format. We will also discuss some of the benefits and challenges of using the 1999 Definitions for credit derivative transactions.
What are the 1999 ISDA Credit Derivatives Definitions?
The 1999 Definitions are primarily an expansion and revision of the 1998 Confirmation of OTC Swap Transaction (Single Reference Entity, Non-Sovereign), which was a short form confirmation for single-name CDS transactions. The 1999 Definitions cover a wider range of credit derivative products, such as basket CDS, credit-linked notes, total return swaps, and credit spread options. They also introduce new terms and concepts, such as successor, restructuring, and settlement method.
The 1999 Definitions consist of four main parts:
The Introduction, which provides an overview of the purpose and scope of the 1999 Definitions and explains how they should be used in conjunction with other ISDA documents.
The General Terms, which define the basic terms and concepts that apply to all credit derivative transactions, such as reference entity, obligation, credit event, settlement method, and calculation agent.
The Credit Events, which define the specific events that trigger a payment or delivery obligation under a credit derivative transaction, such as bankruptcy, failure to pay, obligation acceleration, obligation default, repudiation/moratorium, and restructuring.
The Appendices, which contain additional definitions, provisions, and examples that supplement or modify the General Terms and the Credit Events.
The 1999 Definitions are not a standalone document that can be used to document a credit derivative transaction. They are intended to be incorporated by reference into a confirmation that specifies the particular terms and conditions of the transaction, such as the trade date, the effective date, the scheduled termination date, the notional amount, the fixed rate, the floating rate, the reference entity, the obligation characteristics, the credit events, the settlement method, and any other relevant details. The confirmation may also include any amendments or supplements to the 1999 Definitions that are agreed by the parties.
Key terms and concepts in the 1999 Definitions
Reference Entity and Successor
The reference entity is the entity whose credit risk is transferred or hedged by a credit derivative transaction. It can be a corporation, a sovereign, a financial institution, or any other legal entity that issues or guarantees debt obligations. The reference entity is identified by its name and address in the confirmation.
However, the reference entity may change over time due to various corporate events, such as merger, acquisition, spin-off, or name change. To address this issue, the 1999 Definitions introduce the concept of successor. A successor is an entity that assumes all or substantially all of the obligations of the reference entity or becomes its parent company or subsidiary. If a succession event occurs during the term of a credit derivative transaction, the successor becomes the new reference entity for the purposes of determining whether a credit event has occurred.
The 1999 Definitions provide detailed rules and procedures for identifying and notifying a successor. They also allow the parties to specify in the confirmation whether they want to apply a multiple holder obligation provision or a multiple successor provision. These provisions affect how many successors can be recognized as reference entities and how many obligations can be delivered for settlement in case of multiple successors.
Obligation and Deliverable Obligation
An obligation is a debt instrument that is issued or guaranteed by the reference entity and is subject to a credit event. For example, an obligation can be a bond, a loan, a note, a commercial paper, or any other form of indebtedness. The 1999 Definitions allow the parties to define the characteristics of an obligation in the confirmation, such as its currency, maturity date, payment rank (senior or subordinated), interest rate (fixed or floating), transferability (freely transferable or not), and type (standard or convertible).
a deliverable obligation must have a maturity date that is no later than the scheduled termination date of the credit derivative transaction, must have an outstanding principal balance of at least $1 million or its equivalent in another currency, must not be subordinated to any other obligation of the reference entity, and must not be subject to any contingency or conditionality.
The 1999 Definitions also allow the parties to specify in the confirmation whether they want to apply a non-deliverable obligation provision or a deliverable obligation characteristic provision. These provisions affect how the obligations are identified and valued for physical settlement purposes.
Credit Event and Credit Event Notice
A credit event is an event that indicates a deterioration or default of the creditworthiness of the reference entity. The occurrence of a credit event triggers a payment or delivery obligation under a credit derivative transaction. The 1999 Definitions define six types of credit events:
Bankruptcy: The reference entity becomes insolvent, files for bankruptcy, is placed under administration, receivership, or liquidation, or makes a general assignment for the benefit of its creditors.
Failure to Pay: The reference entity fails to make a payment on any obligation when due and such failure continues beyond a grace period.
Obligation Acceleration: The maturity of any obligation of the reference entity is accelerated due to a default or an event of default.
Obligation Default: Any obligation of the reference entity becomes due and payable before its scheduled maturity date due to a default or an event of default.
Repudiation/Moratorium: The reference entity or a governmental authority disaffirms, disclaims, rejects, or challenges the validity of any obligation of the reference entity or imposes a moratorium on its payments.
Restructuring: The terms of any obligation of the reference entity are amended or modified due to its financial difficulties in a way that results in a reduction in the amount or postponement of the date of payment.
The 1999 Definitions allow the parties to choose which credit events they want to apply to their credit derivative transaction in the confirmation. They also provide detailed rules and examples for determining whether and when a credit event has occurred.
If either party believes that a credit event has occurred, it must deliver a credit event notice to the other party. A credit event notice is a written notice that specifies the details of the credit event, such as its date, description, and affected obligations. The 1999 Definitions specify the form and content of a credit event notice and the time period within which it must be delivered.
Settlement Method and Settlement Amount
The settlement method is the way in which the parties settle their payment or delivery obligations under a credit derivative transaction after a credit event has occurred. The 1999 Definitions define two types of settlement methods:
Cash Settlement: The seller pays the buyer an amount equal to the difference between the notional amount and the final price of one or more deliverable obligations multiplied by a recovery rate. The final price is determined by polling dealers in the market or by referring to publicly available sources. The recovery rate is either specified in the confirmation or calculated as 100% minus the final price.
Physical Settlement: The buyer delivers one or more deliverable obligations to the seller and receives from the seller an amount equal to the notional amount. The buyer may choose which deliverable obligations to deliver from a list provided by the seller or from all obligations that meet certain characteristics.
The 1999 Definitions allow the parties to choose their preferred settlement method in the confirmation. They also provide detailed rules and procedures for calculating and making payments or deliveries under each settlement method.
How to use the 1999 Definitions in practice?
The 1999 Definitions are widely used in practice for documenting various types of credit derivative transactions. Here are some examples:
A single-name CDS is a credit derivative transaction that transfers or hedges the credit risk of a single reference entity. The buyer pays a periodic fee (the fixed rate) to the seller and receives from the seller a payment (the settlement amount) if a credit event occurs on the reference entity during the term of the transaction. The parties may choose any settlement method they prefer.
A basket CDS is a credit derivative transaction that transfers or hedges the credit risk of multiple reference entities. The buyer pays a periodic fee (the fixed rate) to the seller and receives from the seller a payment (the settlement amount) if a credit event occurs on any of the reference entities (the first-to-default basket) or on a specified number of the reference entities (the nth-to-default basket) during the term of the transaction. The parties may choose any settlement method they prefer.
A credit-linked note (CLN) is a debt instrument that pays a periodic coupon and principal at maturity, unless a credit event occurs on a reference entity, in which case the principal is reduced or replaced by a deliverable obligation. The issuer of the CLN sells the credit risk of the reference entity to the investors of the CLN. The 1999 Definitions are used to define the terms and conditions of the credit event and the settlement method.
A total return swap (TRS) is a credit derivative transaction that transfers or hedges both the credit risk and the market risk of an underlying asset. The buyer pays to the seller the total return (interest, principal, and capital gains or losses) of the underlying asset and receives from the seller a periodic payment (the floating rate) based on a notional amount. If a credit event occurs on the underlying asset, the buyer may deliver the underlying asset to the seller and receive from the seller an amount equal to its fair market value. The 1999 Definitions are used to define the terms and conditions of the credit event and the settlement method.
A credit spread option (CSO) is a credit derivative transaction that gives the buyer the right, but not the obligation, to enter into a CDS with the seller at a specified spread (the strike rate) on a specified date (the exercise date). The buyer pays an upfront premium (the option fee) to the seller for this right. If a credit event occurs on the reference entity before or on the exercise date, the option expires worthless. The 1999 Definitions are used to define the terms and conditions of the credit event and the settlement method.
Benefits and challenges of using the 1999 Definitions
Benefits
Using the 1999 Definitions for credit derivative transactions has several benefits, such as:
Reducing legal uncertainty and risk by providing clear and consistent definitions of key terms and concepts.
Enhancing market efficiency and liquidity by facilitating standardization and comparability of credit derivative contracts.
Increasing flexibility and innovation by allowing customization and modification of certain terms and conditions.
Improving dispute resolution and enforcement by providing rules and procedures for determining and notifying credit events and settlement methods.
Challenges
However, using the 1999 Definitions for credit derivative transactions also poses some challenges, such as:
Keeping up with market developments and changes in credit risk practices that may require amendments or supplements to the 1999 Definitions.
Interpreting and applying complex and technical definitions and provisions that may involve subjective judgments or discretion.
Dealing with potential inconsistencies or conflicts between different versions or supplements of the 1999 Definitions or other ISDA documents.
Managing operational risks and costs associated with processing and settling credit derivative transactions under different scenarios.
How to download the 1999 Definitions in PDF format?
If you want to download the 1999 Definitions in PDF format, you can follow these steps:
Go to ISDA's website at https://www.isda.org.
Click on "Bookstore" in the top menu bar.
Type "1999 ISDA Credit Derivatives Definitions" in the search box and click on "Search".
Select "1999 ISDA Credit Derivatives Definitions" from the list of results.
Click on "Buy E-book" to purchase an electronic version of the 1999 Definitions for $80 if you are an ISDA member or $160 if you are not.
Alternatively, you can click on "Free downloads" to access some parts of the 1999 Definitions for free, such as the table of contents, introduction, supplements, commentaries, memoranda, and short form confirmations.
After completing your purchase or selecting your free downloads, you will receive an email with a link to download your files in PDF format.
Open your email and click on the link to download your files. You may need to enter your username and password if you have an ISDA account.
Save your files to your computer or device and enjoy reading them.
Conclusion
what are the 1999 ISDA Credit Derivatives Definitions, how they work, how to use them in practice, and how to download them in PDF format. We have also discussed some of the benefits and challenges of using the 1999 Definitions for credit derivative transactions.
The 1999 Definitions are a comprehensive and flexible framework for documenting various types of credit derivative transactions that transfer or hedge the credit risk of an underlying entity or asset. They provide clear and consistent definitions of key terms and concepts, such as reference entity, obligation, credit event, and settlement method. They also allow customization and modification of certain terms and conditions to suit the parties' preferences and needs.
However, the 1999 Definitions are not without limitations and difficulties. They may not capture all the nuances and complexities of credit risk practices and market developments. They may also require careful interpretation and application to avoid ambiguity and disputes. Moreover, they may entail operational risks and costs associated with processing and settling credit derivative transactions under different scenarios.
Therefore, if you are interested in using the 1999 Definitions for your credit derivative transactions, you should familiarize yourself with their content and structure, consult with legal and financial experts, and follow the rules and procedures specified in the 1999 Definitions and other ISDA documents. You should also keep an eye on any amendments or supplements that ISDA may publish from time to time to update or revise the 1999 Definitions.
If you want to learn more about the 1999 Definitions or other ISDA publications, you can visit ISDA's website at https://www.isda.org or contact ISDA's offices in New York, London, Hong Kong, Singapore, Tokyo, or Washington D.C.
FAQs
Here are some frequently asked questions about the 1999 Definitions:
What is the difference between the 1999 Definitions and the 2003 Definitions?
option (with or without limit), and non-deliverable cross currency swap transaction deliverable obligation characteristic inclusion option (with or without limit).
The 2003 Definitions are more comprehensive and flexible than the 1999 Definitions, but they are also more complex and technical. The parties can choose which version of the definitions they want to use for their credit derivative transactions in the confirmation.
What is the difference between a credit event and a settlement event?
A credit event is an event that indicates a deterioration or default of the creditworthiness of the reference entity. A settlement event is an event that triggers a payment or delivery obligation under a credit derivative transaction. A credit event is always a settlement event, but a settlement event may not always be a credit event. For example, the termination of a credit derivative transaction due to an illegality, a force majeure, or an early termination event under the ISDA Master Agreement is a settlement event, but not a credit event.
What is the difference between cash settlement and physical settlement?
Cash settlement is a settlement method that involves the payment of an amount equal to the difference between the notional amount and the final price of one or more deliverable obligations multiplied by a recovery rate. Physical settlement is a settlement method that involves the delivery of one or more deliverable obligations in exchange for an amount equal to the notional amount. Cash settlement is simpler and faster than physical settlement, but it may involve more uncertainty and risk due to the valuation of the deliverable obligations.
What is the difference between bankruptcy and restructuring?
Bankruptcy and restructuring are two types of credit events that indicate different degrees of severity of the creditworthiness of the reference entity. Bankruptcy is a credit event that occurs when the reference entity becomes insolvent, files fo