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ISDA Credit Event definitions

The 1999 Definitions have been replaced by 2003 Definitions. For important changes, see our news page.

ISDA Credit Event definitions are a part of 1999 Credit Derivative Definitions. The 1999 Definitions are standard industry terms which are usually incorporated by contracting parties in their swap agreements.

The 6 Credit Events under ISDA Definitions are:

  1. Bankruptcy
  2. Obligation Acceleration
  3. Obligation Default
  4. Failure to Pay
  5. Repudiation/Moratorium
  6. Restructuring

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A. CREDIT EVENTS

1. Bankruptcy

Bankruptcy in the 1999 Definitions mirrors the wording of Section 5(a)(vii) of the ISDA Master Agreement. It is widely drafted so as to be triggered by a variety of events associated with bankruptcy or insolvency proceedings under English law and New York law, as well as analogous events under other insolvency laws.

ISDA is aware that the scope of the definition of Bankruptcy may be wider than insolvency-related events falling within the credit assessment criteria used by rating agencies. Certain actions taken by the reference entity, for instance, a board meeting or a meeting of shareholders to consider the filing of a liquidation petition, could be argued as being in furtherance of an act of bankruptcy and thus triggering a Credit Event, even though such act would not generally be considered a bankruptcy event in the context of credit assessment by a rating agency. Therefore, the inclusion of this Credit Event could provide credit protection ahead of such circumstances.

By contrast, a guarantee would not typically provide any protection against insolvency-related events ahead of an actual failure to pay.

2. Obligation Acceleration

Obligation Acceleration covers the situation, other than a Failure to Pay, where the relevant obligation becomes due and payable as a result of a default by the reference entity before the time when such obligation would otherwise have been due and payable. The Default Requirement builds in a minimum threshold which the relevant sum being accelerated must exceed before the Credit Event occurs.

The scope of this Credit Event forms a subset of that of Obligation Default. Thus if Obligation Default is specified as a Credit Event in the relevant credit derivatives transaction, this Credit Event will only be of relevance if the Default Requirement is lower than that in respect of the Obligation Default.

The credit considerations are discussed under Obligation Default below.

3. Obligation Default

Obligation Default covers the situation, other than a Failure to Pay, where the relevant obligation becomes capable of being declared due and payable as a result of a default by the reference entity before the time when such obligation would otherwise have been capable of being so declared. The Default Requirement builds in a minimum threshold which the relevant sum being defaulted or capable of being accelerated must exceed before the Credit Event occurs.

It may be important to note that the concept of "default" used in the present context refers to a default under the relevant provisions of the relevant contract or agreement.

4. Failure to Pay

Failure to Pay is defined to be a failure of the reference entity to make, when and where due, any payments under one or more obligations. Grace periods for payment are taken into account.

The failure of payment is critical to the credit risk borne by a protection buyer under a credit derivative product. A failure to pay by an underlying reference entity also encompasses the situations in which guarantee payments are generally triggered.

5. Repudiation/Moratorium

Repudiation/Moratorium deals with the situation where the reference entity or a governmental authority disaffirms, disclaims or otherwise challenges the validity of the relevant obligation. A default requirement threshold is specified.

6. Restructuring

Restructuring covers events as a result of which the terms, as agreed by the reference entity or governmental authority and the holders of the relevant obligation, governing the relevant obligation have become less favourable to the holders that they would otherwise have been. These events include a reduction in the principal amount or interest payable under the obligation, a postponement of payment, a change in ranking in priority of payment or any other composition of payment. A default threshold amount can be specified.

This approach purports to adopt an objective approach by identifying specific events that are typical elements of a restructuring of indebtedness. As restructuring events could be those undertaken by a reference entity that would result in the credit quality being improved or remaining the same, the Credit Event under the 1999 Definitions is specified not to occur in circumstances where the relevant event does not result from a deterioration in the creditworthiness or financial condition of the reference entity.

The restructuring definition was amended in April 2001 by adding a new supplement - see our news report here.