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ISDA Proposes Amendments To Counter “Manufactured” Credit Derivative Defaults

On March 6, the International Swaps and Derivatives Association (ISDA) published for public comment some proposed amendments to the 2014 ISDA Credit Derivatives Definitions to address the issue of “narrowly tailored” or “manufactured” credit events. This type of credit event came under scrutiny by ISDA because of a few situations in which a company was apparently induced to default on some of its debt in return for advantageous financing, thus creating a credit event for purposes of credit derivatives referencing the company even though the company was not in actual economic distress.

The primary solution proposed by the ISDA working group that examined the issue is the inclusion of a “Credit Deterioration Requirement” in the “Failure to Pay” credit event. If the amendments are adopted, a non-payment will not be a credit event unless, directly or indirectly, it results from, or results in, a deterioration in the creditworthiness or financial condition of the relevant entity.

Feedback on the proposals is requested by March 27.

The text of the proposal is available here.

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About this Author

Guy Dempsey Jr., Bank Regulations Legal Specialist, Katten Muchin
Partner

Guy C. Dempsey Jr. concentrates his practice on derivatives and structured products and on bank regulation. He advises clients on derivatives transactions of all types across all asset classes, as well as on the corporate governance, regulatory, collateral, compliance, insolvency and litigation issues associated with such products.

Much of Guy’s work involves helping bank and non-bank clients analyze the details and impact of the Dodd-Frank Act. He maintains deep knowledge of the banking laws and regulations relating to capital markets activities....

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