March 14, 2019

ISDA proposed amendments to the 2014 ISDA Credit Derivatives Definitions to address issues related to the narrowly tailored credit events (NTCEs). Feedback was requested by April 10, 2019. NTCEs are arrangements with corporations that cause a credit event leading to settlement of credit default swap (CDS) contracts while minimizing the impact on the corporation. ISDA also published the views of its Chief Executive Officer Scott O'Malia on the proposed amendments.

The proposal includes the following amendments:

  • Proposed Amendment to "Failure to Pay" Definition and Publication of Guidance Memo. The definition of the Failure to Pay Credit Event (Section 4.5 of the Definitions) will be amended to add a requirement that the relevant payment failure result from or in a deterioration in creditworthiness or financial condition of the Reference Entity. This requirement would apply to corporate and financial Reference Entities but would not apply to sovereign Reference Entities. To provide additional clarity to apply the new test, a guidance memo will be published. The guidance memo will set out the purpose of this requirement and a non-exhaustive list of factors that should be taken into account in making a determination under the new test. The proposed amendment to the Failure to Pay definition and text of the guidance memo has been attached as Annex 1. 
  • Proposed Clarification to "Outstanding Principal Balance" Definition. Section 2.10 of the Definitions requires the Outstanding Principal Balance to be determined using the “Quantum of the Claim,” which is determined in accordance with the applicable law. Section 2.10 of the Definitions will be amended to add a clarification that the “applicable law” includes any bankruptcy or insolvency law that would apply to the Reference Entity if it were to enter bankruptcy or insolvency proceedings. The proposed amendment to the Outstanding Principal Balance Definition has been attached as Annex 2.

These proposals were discussed by the ISDA working group comprising members of the ISDA Credit Steering Committee and additional ISDA members active in the CDS market. Although the working group has not yet completed its work and, therefore, may have additional proposals, these amendments represent some of the most important aspects of the proposed changes agreed by the working group to date.


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Comment Due Date: April 10, 2019

Keywords: International, Banking, Securities, NTCE, Credit Default Swap, Credit Derivatives Definitions, Failure to Pay, Credit Risk, ISDA