ISDA proposed amending the 2014 ISDA Credit Derivatives Definitions ("Credit Definitions") for "narrowly tailored credit events" ("NTCEs"). Under the proposal, NTCEs are defined as arrangements with an issuer that cause a credit event leading to a credit default swap settlement while minimizing impact on the issuer.
Among other things, the proposal would amend the definition of "failure to pay credit event" in Section 4.5 of the Credit Definitions to add an optional requirement that the relevant failure "result from or in a deterioration in creditworthiness or financial condition" of the relevant reference entity. The definition would also reference a guidance memo published by ISDA to add further color to the definition. The guidance memo cites recent events in the credit derivatives markets and notes that the new provisions were "introduced with the intention that a narrowly tailored payment default should not constitute a Failure to Pay Credit Event."
The statement acknowledges that an "exhaustive definition" of NTCEs is not possible, but sets forth a series of non-exclusive factors that may be considered by the Determinations Committee (or parties to a bilateral contract). ISDA also noted that the working group - composed of members of ISDA's Credit Steering Committee - may have further proposals. Comments on the proposed amendments must be submitted to ISDA by March 27, 2019.
Commentary / Nihal Patel
In its statement, ISDA acknowledges that what is being proposed does not list all possible NTCEs, but common features different from regular payment defaults. This makes sense and the guidance note provides relevant factors that would be considered in making a determination. As under the current definitions, market participants should always bear in mind when entering into credit default swaps ("CDS") thatissuers could enter into arrangements that may or may not trigger events as a party might expect.
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Beyond the overall policy, market participants should also keep in mind that the proposed languages intentionally presents some ambiguity. Under the current definitions, CDS could be triggered in unexpected ways that are not related to creditworthiness, but there is somewhat more certainty as to what actually is a triggering event. The proposal aims to ensure triggering events are related to creditworthiness, but in order to do so, it is necessary to introduce some additional ambiguity.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.