JPM CDS v2.0 2010 06 30

Europe Credit Research
01 July 2010
CDS v2.0
The new architecture of the CDS market
• Summary - Over the past year the CDS market has undergone the most Credit Derivatives Research
substantial changes since the introduction of the ISDA 2003 Standard Saul Doctor
AC
Terms and Definitions. These changes are aimed at standardising CDS (44-20) 7325-3699
contracts and reducing annuity and counterparty risks. We review the saul.doctor@jpmorgan.com
motivation behind the changes and analyse their impact on the market. J.P. Morgan Securities Ltd.
AC
Harpreet Singh
• Documentation, conventions and regulations - The major changes in (91-22) 6157-3279
the structure of the CDS market cover three main areas: harpreet.x.singh@jpmorgan.com
J.P. Morgan India Private Limited

o CDS documentation changes - Big Bang and Small Bang Abel Elizalde
protocols aimed at standardising CDS contracts to facilitate (44-20) 7742-7829
clearing and reduction in notional outstanding. abel.elizalde@jpmorgan.com
J.P. Morgan Securities Ltd.

o Trading/quoting convention changes - Standard coupons
facilitate the netting of CDS contracts and standard models allow
easy conversion between upfront and spread.
o CDS clearing - Central clearing has been introduced to reduce

counterparty risk and protect investor margins.
• Risk reduction and liquidity improvement - Data from DTCC shows

that there has been a reduction in the gross notional outstanding and an
increase in the volume traded over the past year. Thus, the efforts to
improve product documentation and market conventions have been
successful. They have not only helped in facilitating netting and clearing
but have increased the liquidity in the market.
Figure 1: Gross Notional outstanding for all credit products Figure 2: Monthly volume (increases) traded for all credit products
$ Trillion. $ Trillion. Rolling 4-week average volume, only considering new trades.
34 9.5
32 8.5
30 7.5
28 6.5
26 5.5
24 4.5
Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10
Source: DTCC. Source: DTCC.
See page 37 for analyst certification and important disclosures.

J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may
have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their
investment decision.
Saul Doctor Europe Credit Research
(44-20) 7325-3699 01 July 2010
saul.doctor@jpmorgan.com
Harpreet Singh
(91-22) 6157-3279
harpreet.x.singh@jpmorgan.com
Table of Contents
Overview ...................................................................................3
CDS Documentation Changes.................................................4
Big Bang Protocol........................................................................................................4
Small Bang Protocol ....................................................................................................7
Trading and Quoting Conventions........................................10
Trading with upfront plus fixed coupon ....................................................................11
Restructuring standards..............................................................................................12
Full first coupon.........................................................................................................12
CDSW changes ..........................................................................................................12
Tranche quoting convention changes.........................................................................15
Central Clearing......................................................................16
Appendix .................................................................................21
Appendix A: CDS Determinations Committee..........................................................21
Appendix B: Credit Events and Restructuring Standards ..........................................23
Appendix C: Auction Process ....................................................................................27
Appendix D: Auction Case Study - Thomson Restructuring .....................................31
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Overview
The CDS market has undergone substantial changes in the recent past. Most of these
changes are aimed at standardising CDS contracts to facilitate the reduction in
notional outstanding and to reduce annuity and counterparty risks. In this publication
we summarise these changes and analyse how they have changed the structure of the
CDS market in terms of the documentation and trading conventions. We also review
the introduction of CDS clearing and the CDS Determinations Committee as well as
their role in achieving the above mentioned goals.
CDS Documentation – The main changes in the CDS documentation were

introduced via the Big Bang and the Small Bang protocols. These changes
standardised CDS contracts in order to facilitate clearing and outstanding notional
reduction. The most important changes were the “hard-wiring” of the auction
process into the documentation, rolling effective date and the treatment of
restructurings. Additionally, a CDS Determinations Committee has been set up to
determine whether or not a credit event or succession event has occurred.
Trading/Quoting Conventions – Trading conventions have been improved to allow
easier netting and clearing of CDS contracts, with the final aim of improving
liquidity in the market. Trading of all CDS contracts is now done on an upfront plus
fixed coupon format and a full first coupon has been introduced. These changes
facilitate the netting of contracts. Quoting is generally done in flat spread terms, and
the ISDA Upfront Model (available via CDSW in Bloomberg) has been introduced to
standardise the process of converting upfronts to flat spreads and vice-versa. The
restructuring standard was changed for North American contracts, which now trade
with “No Restructuring” (NR). European contracts, as before, trade with “Modified
Modified Restructuring” (MMR) as the restructuring standard.
In line with the single name CDS and CDS indices, iTraxx and CDX tranches trade
with an upfront plus fixed coupon format. For iTraxx tranches, junior tranches (0-3%,
3-6%, 6-9%) are quoted as upfront plus fixed coupon and senior tranches (9-12%, 12-
22%, 22-100%) are quoted as flat spreads.
CDS Clearing - A CDS clearing house is a financial institution that acts as a central
counterparty to all cleared CDS contracts. In a “cleared” CDS contract, the buyer and
seller of protection face the clearing house, as opposed to each other (as in a bilateral,
i.e. “not cleared”, contract). The CDS clearing house is intended to reduce
counterparty risk and facilitate netting. According to InterContinentalExchange
(ICE), which offers clearing services in the US and Europe, the result of netting can
be as much as 90% reduction in the notional outstanding with the introduction of a
CDS clearing house.
According to The Depository Trust & Clearing Corporation (DTCC), since October
2008, the gross notional outstanding for CDS has dropped from $33.56 trillion to
$24.80 trillion in Jun 2010, whereas the 4 week rolling average increases in volume
traded (considering only new trades) has increased from $5.4 trillion in March 2009
to around $7.7 trillion in June 2010.
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CDS Documentation Changes

In this section we present the changes introduced in the market by way of the new
CDS documentation. The Big Bang and the Small Bang protocols were introduced to
standardise contracts in order to facilitate clearing and netting (i.e. to bring the
amount of gross notional outstanding closer to the net notional outstanding). After
the Big Bang and the Small Bang protocols, CDS contracts have the auction process
“hard-wired” into the documentation, a rolling effective date and a different
restructuring auction process. A CDS Determinations Committee has been set up to
determine whether or not a credit event or succession event has occurred.
Big Bang Protocol

ISDA Auction Supplement Protocol
In April 2009, ISDA introduced the “Big Bang Protocol” which applies to all new
trades irrespective of region. Existing investors were given an opportunity to sign up
to the protocol, thereby migrating their old trades to the new protocol. Since all new
trades already incorporate the new supplement which applies the Big Bang protocol,
new investors do not need to sign up to the protocol. The Big Bang protocol
specified the following changes for all new CDS contracts:
1. All trades are subject to the various determinations of the Credit Derivatives
Determination Committee;
2. All trades contractually settle via the auction;
3. All trades are subject to the dynamic look back effective date; and
4. New rules governing the FX rate used for bonds denominated in a currency
other than the contract currency.
We review these changes below.
1. A CDS Determinations Committee has been established to determine

whether or not a Credit Event or Succession Event has occurred. The CDS
Determinations Committee (DC) is made up of 15 dealer and non-dealer
investors with the International Swaps and Derivatives Association (ISDA) as
the Secretary and coordinator. The Committee’s purpose is to answer, in a
timely manner, legal and contractual questions about credit derivatives,
specifically Credit Events and Succession Events. The DC also vets and
approves the deliverable obligations list ahead of CDS settlement auctions. If
80% of the members agree on an issue, the answer is finalised and binding to all
CDS contracts. If not, the question is moved to a three member arbitration panel
who will deliver the final answer. The DC formalises the previous market
practice of decision making in which ISDA would gather dealers, request
feedback from other investors and debate questions until consensus answers
were determined. We review this committee further in detail in Appendix A:
CDS Determinations Committee.
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2. Settlement of CDS contracts upon a credit event is through the CDS

auction. Prior to the introduction of the “Big Bang Protocol”, settlement of CDS
contracts was through physical settlement where the buyer of protection would
deliver bonds and the seller of protection would pay par to the buyer of
protection. Since 2005, an auction process was available to investors who
wished to sign up to the auction. For each individual credit event, investors were
required to sign up to a new auction protocol. Within the auction, investors could
opt for either cash or physical settlement.
The Big Bang protocol ensures that all contracts settle via the auction as it is
now hard-wired into the CDS documentation. As before, investors can still opt
for physical or cash settlement via the auction. Investors will still be able to
settle their contracts outside of the auction, but this will need to be by mutual
consent of both counterparties.
3. The effective date for all CDS contracts is a rolling x-60 days for Credit
Events and x-90 days for Succession Events. Prior to the Big Bang protocol,
for a buyer of protection the protection started one business day after the trade
date and lasted until the maturity of the contract. Therefore, if a credit event took
place on the trading day, i.e. at time t, the protection buyer was not covered by
this CDS as the effective date was a static t+1 fixed in time. This is illustrated in
Figure 3.
Figure 3: Earlier contracts were not fungible: If contract 1 and contract 2 are traded at different dates, they did not provide credit event
coverage for the same time span…
Trading date Today Maturity date
Contract 1
Trading date +
1 business day
Contract 2
Trading date +
1 business day
Source: J.P. Morgan.
After the changes introduced by the Big Bang protocol, CDS contracts provide
credit event protection starting 60 calendar days prior to today’s date
(independent of the trading date and therefore rolling every day) until the
maturity of the contract. In other words, since June 2009 CDS contracts have a
rolling x-60 (or x-90) effective date: all contracts have identical effective dates
on any given day, making them completely fungible. Similarly, the new CDS
contract covers succession events between 90 calendar days before today’s date
and the maturity of the contract.
For example, the effective dates for two trades on the same credit, one done at x
and the other at x+10 under the documentation prior to Big Bang were x+1 and
x+11, irrespective of where we are in the contract (Figure 3), whereas after the
Big Bang protocol both trades have a rolling effective date of x-50 on day x+10.
This is illustrated in Figure 4.
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Figure 4: …whereas new contracts are completely fungible, as two contracts traded on different days always cover the same period of time.
Contract 1
Today – 60
calendar days
Contract 2
Today – 60
calendar days
4. FX rate for deliverable obligations. Once the auction price has been
determined, CDS counterparties that have opted for physical settlement need to
settle their contracts: protection buyers deliver obligations with a face value
equal to the CDS notional and receive par, whereas protection sellers pay par
and receive the delivered obligations. After the auction, sellers of bonds (i.e.
protection buyers) need to deliver the “Notice of Physical Settlement” (NOPS)
to the relevant bidder in the auction, specifying the deliverable obligations they
will deliver. Protection buyers can switch to a different bond or loan in a
different deliverable currency during the period between the delivery of NOPS
and the physical settlement date by delivering another NOPS.
The changes introduced by the Big Bang protocol relate to the FX rates used
when the protection buyer changes the currency of the deliverable obligations.
These changes facilitate the FX hedging by the protection seller (who may be
receiving bonds in a different currency than the CDS contract).
Prior to the Big Bang protocol, if the protection buyer delivered a new NOPS
changing the currency of the obligations to deliver, the protection buyer used the
exchange rate between the contract currency and the new currency to determine
the amount of notional he would have to deliver. The drawback of this process
was that, if the protection buyer changed the currency of the deliverable
obligations multiple times, it would leave the protection seller unable to hedge
his currency risk.
Under the Big Bang protocol the FX rate to be used for deliverables
denominated in a currency different from the contract currency is re-spotted
every time a “Notice of Physical Settlement” (NOPS) is delivered and uses the
new and old currency for the FX rate.
As an example, consider a buyer of protection that needs to deliver €100mm of
Table 1: Example exchange rate
bonds. At the day of delivering the first NOPS, if the $/€ exchange rate is 1.5,
movements
the buyer of protection needs to deliver $150mm of bonds. Let's assume that the
Exchange rate $/ € exchange rate moves to 1, the £/€ exchange rate is 0.75 and the buyer
Currency Earlier Later
$/€ 1.5 1
decides to deliver in £ (by delivering a new NOPS). Prior to the Big Bang, he
£/€ 1 0.75 would have had to deliver £75mm notional of bonds as the contract currency is €
£/$ 0.66 0.75 and the new currency is £. After the Big Bang was introduced, the protection
Source: J.P. Morgan. buyer has to deliver £112.5mm notional worth of bonds as the new currency is £
but the old currency is $ (using £/$ exchange rate as 0.75).
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Small Bang Protocol

Restructuring and maturity
Following the CDS Big Bang Protocol in April 2009, ISDA introduced a Small Bang
limitations Protocol to address the auction process following a restructuring credit event. Since
triggering a restructuring contract is optional, these changes were introduced as a
Unlike other credit events, such as
bankruptcy or failure to pay,
separate protocol to the Big Bang. The changes are primarily applicable for the
restructuring credit events specify European CDS market where restructuring remains a credit event, although the
maturity limitations for the deliverable protocol does apply to hereditary MR (“Modified Restructuring”) US corporate CDS
obligations. This is the case, for contracts and any future contracts done on the MR or MMR (“Modified Modified
example, for the restructuring standard Restructuring”) standard. In Appendix B: Credit Events and Restructuring Standards
used in European corporate CDS
(MMR).
we look at different types of credit events, with a focus on restructuring and different
restructuring standards.
The main reason is that the pricing of
bonds of a restructured company may
be very different across maturities; this
Restructuring under the Big Bang
is generally not the case for other The Big Bang Protocol specifies that the Determination Committee (DC) determines
credit events such as bankruptcy and whether a restructuring event has occurred or not. If they confirm that such a
failure to pay, where all bonds tend to restructuring event occurred, both the protection buyers and sellers are able to trigger
price at similar levels irrespective of their CDS contracts (although they are not required to do so). The reason for not
their maturity after the credit event.
requiring CDS contracts to be triggered on a restructuring event is two-fold:
Thus, in order to ensure that the
payout from a restructuring event is 1. It may not necessarily be in the economic interest of the buyer of protection to
economically fair relative to the
underlying bonds, restructuring credit
trigger the contract.
events limit the maturity of deliverable 2. Different obligations are deliverable into the CDS contract depending on whether
obligations.
the buyer or the seller triggers the contract.
Since the maturity of the contract will determine which obligations are deliverable
into a particular contract following a restructuring event, there could be as many
auctions required to be held as there are CDS maturities in the market.
Restructuring under the Small Bang

After a restructuring credit event has taken place, the Small Bang protocol for a
Modified Modified Restructuring (MMR) contract specifies eight possible “maturity
buckets”. A different auction is held for each maturity bucket (Table 2), depending
on the maturity of the CDS contract and whether the buyer or the seller of protection
has triggered the contract. Each maturity bucket limits the maturity of the deliverable
obligations that can be delivered into the auction for that bucket.
Table 2: Modified Maturity limitation for restructuring under Small Bang

Remaining maturity of CDS: Auction obligations:
<2.5 years Restructured obligations up to 5 yrs
Non restructured obligations up to 2.5 yrs
2.5 to 5 years Restructured and non restructured obligations up to 5 yrs
5 to 7.5 years Restructured and non restructured obligations up to 7.5 yrs
15 to 20 years Restructured and non restructured obligations up to 20 yrs
>20 years or protection seller triggers Restructured and non restructured obligations up to 30 yrs
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If the protection buyer triggers the contract, it is entered into the bucket
corresponding to the maturity of the CDS contract. For each bucket shown in Table
2, the deliverable obligations are restricted by a maximum maturity corresponding to
that bucket. For example a protection buyer with a CDS contract maturity falling due
within the 2.5 to 5 year bucket will be able to deliver any obligation up to 5 years.
Any contract longer than 20 years will be entered into the >20 year bucket. Also if
the protection seller triggers the contract then it will be entered into the final bucket
and any obligation up to 30 years can be delivered.
The Rounding Down Convention

In order to limit the optionality of being able to deliver longer-dated bonds into a
shorter-dated contract, contracts are rounded down to a lower bucket unless an
enabling deliverable obligation exists. An enabling deliverable obligation is a
deliverable obligation with a maturity above the bucket lower bound, but below the
contract maturity. For example, a protection buyer with six years to maturity on his
CDS contract would be able to deliver 7.5-year debt only if there is a deliverable
obligation with maturity between 5 and 6 years. Otherwise the contract would be
pushed down to the 2.5 to 5-year bucket. This is deemed fair since the buyer would
not be able to physically settle with the longer-dated bond in previous standard CDS
settlement.
Neither the buyer nor the seller of protection is obliged to trigger the contract on a
restructuring event, although if neither party triggers by the auction date then neither
party can trigger on that particular restructuring event in the future.
Restructuring and Index products

Indices After a restructuring credit event has been determined all index contracts split into
two contracts: one index contract containing all names except the restructured name
and one single name contract containing only the restructured entity. Assuming the
initial contract had a notional of N and the number of constituents of the index are x,
the notional on the single name would be N/x and the notional on the remaining
index contract would be N*(x-1)/x. The contract splits after the DC determines that
the restructuring credit event has taken place and occurs irrespective of whether
investors trigger the restructuring credit event or not.
Index Options If a restructuring event occurs before the expiry of an index option, option investors
have the right to trigger the restructuring event. The underlying CDS index will split
into two contracts, as we explained above, whether the restructuring credit event is
triggered or not. The decision to trigger the restructuring event will then influence the
decision to exercise the option.
An option contract is treated in the same way as a CDS contract in terms of the
application of the maturity limitation. If the investor, who would enter into a long
protection position if the option contract is exercised, triggers the CDS contract, it is
entered into the bucket corresponding to the maturity of the CDS contract. On the
other hand if the investor who would enter into a short protection position if the
option contract is exercised triggers the CDS restructuring event, it is entered into the
longest dated bucket. For example, if the buyer of a payer option on the iTraxx index
(option to buy protection on the iTraxx index) triggers the CDS contract on a
restructuring event, the maturity limitation applies and he is entered into the bucket
corresponding to the CDS contract maturity. If the seller of a payer option triggers
the CDS contract, it is entered into the longest dated bucket.
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Investors that trigger the restructuring credit event enter the auction and the cash
settlement amount is paid or received at the option expiry, if the option is exercised.
Investors that do not trigger the restructuring credit event and exercise the option on
expiry are entered into an index position (without the restructured name) plus a CDS
on the unexercised single name.
Index Tranches Index tranche investors who wish to trigger their contracts will be entered into the
auction with the result of the auction determining the payment and/or the new
attachment and detachment points of their tranche. These tranches will then become
the standard index tranches referencing the new untranched index (ex-restructured
entity). Since indices with differing maturities could be entered into different
auctions, tranche widths and attachment points could differ across the tenors of the
same index series.
Those tranche investors who do not wish to exercise on the credit event will continue
to hold standard transactions, but will reference a portfolio with the restructured
entity remaining as a constituent.
This section outlined the changes which were “hardwired” into the documentation of
CDS contracts. In the next section we review the changes in trading and quoting
conventions. Trading and quoting conventions do not change anything in the
contract; they are just market conventions that have been adopted to allow easier
netting and clearing of CDS contracts.
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Trading and Quoting Conventions

CDS trading conventions have changed to allow easier netting of CDS contracts and
to remove the risky stream of cashflows resulting from offsetting trades in the
previous trading standard. The main changes to CDS trading conventions are:
1. Trading format: Upfront plus fixed coupon – All CDS contracts now trade in
upfront plus fixed coupon format. Standard coupons for European contracts are
25bp, 100bp, 300bp, 500bp, 750bp and 1,000bp, whereas North American
contracts trade with fixed coupons of 100bp or 500bp.
2. Full first coupon - Single name contracts trade with a full first coupon rather than
a stub. This is applicable to both European and North American contracts.
3. Restructuring Standards - While European contracts trade with Modified
Modified Restructuring (MMR) as a standard for restructuring, North American
contracts trade with No Restructuring (NR) and Sovereign (both Western Europe
and EM) and Emerging Market corporate CDS trade with Old Restructuring (Old
R) as a standard.
Spread Definitions
As mentioned above, all CDS contracts trade with a fixed coupon plus an initial
upfront. While index contracts have always traded this way, single name CDS used
Par Spreads – Running spread, in to be traded (and quoted) on a par spread format.
bp, which generates a zero initial
PV (i.e. upfront), taking the full
CDS curve into account. Although trading is now always done on an upfront plus fixed coupon format,
spreads are generally quoted in order to facilitate the comparison across products
Flat Spreads – Running spread, in
bp, which generates a zero initial
(except for very wide names). Flat spreads, rather than par spreads, are currently
PV (i.e. upfront) using a flat CDS used for quoting purposes. The grey box on the left explains the main differences
curve and a pre-agreed recovery between coupons, par spreads and flat spreads. In order to convert flat spreads to
rate (e.g. 40%). upfront, and vice-versa, as well as to mark-to-market CDS contracts, the ISDA
Coupon – Annual payment, in bp, Upfront Model has been introduced. Thus, the two final changes in CDS trading and
in a CDS contract. In the current quoting conventions are:
trading convention the coupon is
always equal to one of a set of pre- 4. CDS contracts (single names, indices and tranches) are currently traded on
agreed standard fixed coupons. In
the past, when CDS traded on a
an upfront plus fixed coupon format and quoted on a flat spread format
par spread format, the coupon was (except very wide names and junior tranches, which are quoted on an upfront plus
equal to the par spread at the time fixed coupon format).
of entering the contract.
5. CDSW Model changes - The ISDA Upfront Model (available via Bloomberg
Upfront (Cash Amount) – Initial CDSW screen) is used to convert flat spreads to upfronts, and vice-versa, and to
upfront cost to enter the contract.
This amount can be positive or
mark-to-market contracts.
negative and is a function of the As opposed to the changes discussed in the previous section, the changes discussed
fixed coupon used and the market
spread at each point in time.
in this section are just market conventions that have been introduced for easier
netting and clearing.
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Trading with upfront plus fixed coupon

Until last year, the majority of CDS contracts (apart from index and some high yield
single names) traded as par contracts with the coupon equal to the market spread at
the time of entering the contract. This meant that there was no initial upfront
payment between counterparties and that the coupon was paid from protection buyer
to protection seller over the life of the swap.
The problem with this trading convention was that each contract was entered at
potentially different par spreads (and therefore coupons), which made netting of
contracts almost impossible. As an example, consider a CDS contract, traded on a
par spread format, where the investor initially buys protection at 500bp and spreads
widen to 800bp. There are two ways in which the investor could exit the trade: either
he goes to his original counterparty to unwind the trade or he enters into an offsetting
trade with the new spread (i.e. he sells protection at 800bp). This is illustrated in
Figure 5, which assumes a risky annuity of 3. In case of an unwind, the investor
receives the profit on the trade (9% = 300bp times the risky annuity) and the contract
is no longer outstanding. However, if the investor enters into an offsetting contract at
800bp, he is left with a net risky annual coupon of 300bp. This series of cashflows is
risky as it will disappear in case of a default.
Figure 5: Trading on a par spread format - Example
In the current market convention, trading is done on an upfront plus fixed

coupon format. Unlike in the previous trading convention (par spreads), the contract
coupon is fixed, and there is an initial upfront payment to take into account the
difference between the market spread and the fixed coupon. As a consequence, when
an offsetting trade is done with the same standard coupon there is no risky annuity
stream left and hence no residual risk. The fixed coupon is always chosen from a set
of standard coupons.
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Standard trading convention in Europe now provides liquidity at six coupons

for CDS contracts – 25bp, 100bp, 300bp, 500bp, 750bp and 1,000bp. The coupon
closer to the market spread at each point in time would likely be the most liquid one.
While these are the standard coupons, there are no restrictions on market participants
trading coupons other than the six standard coupons should they wish to and can find
a counterparty to execute the trade. Changing market conditions may move liquidity
to new, alternative fixed coupons should the market demand it. Different coupons
will generate different initial upfront payments (in size and potentially sign) for the
same market spread. The introduction of multiple standard coupons allows increased
flexibility and the ability to adapt to market needs. Single name CDS contracts in
North America trade with a fixed coupon of either 100bp or 500bp.
Trading is always done in upfront plus coupon format in all CDS products (single
name, indices and tranches). Quoting, on the other hand, is generally done on a flat
spread format (except for higher spread credits and junior tranches, for which upfront
plus fixed coupon is used for both trading and quoting). The ISDA Upfront Model is
used to convert flat spreads to upfront; we review this model later in this section.
Restructuring standards
Different regions have moved to different restructuring standards. While
Standard North American CDS contracts trade with NR (No Restructuring),
European contracts have MMR (Modified Modified Restructuring) as the
restructuring standard. This means that restructuring is not a credit event for
standard North American CDS contracts. This was implemented because the
operational challenge to settle a CDS trade that has a Credit Event due to a Modified
Restructuring (MR) trigger can be large. Market participants who require
restructuring as a credit event will still be able to do so, but this is not the standard.
Sovereign (both Western Europe and EM) and Emerging Market CDS trade with Old
Restructuring (Old R) as a standard for restructuring.
For a detailed analysis of the different restructuring standards used, please refer to
Appendix B: Credit Events and Restructuring Standards.
Full first coupon

In the current standard trading convention, the full first coupon is paid on the
first payment date, with accrued interest paid/received up to the trade date. This
facilitates making all trades fungible as they all need to pay the full first coupon on
the next coupon date.
For example, consider a standard trade on a 500bp coupon, entered into mid-way
through a coupon period, on 5 August. The protection buyer will receive half of the
quarterly coupon (=62.5bp) on 5 August. On the next coupon date, 20 September, the
protection buyer will pay the full first coupon (=125bp) to the protection seller.
CDSW changes
The ISDA Upfront Model, available via CDSW in Bloomberg, is now the market
standard for converting flat spreads into upfront plus coupons format and vice-
versa. This improves trading and quotation efficiency as the quoting is usually done
in flat spreads even though the contracts are executed in upfront plus coupon format.
We highlight the main changes between the new and the old models.
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The important point to bear in mind when comparing the different models is that the
CDS contract is not changing due to the differing models and that other than the
payment of the coupon, which changed from a short first coupon to a full one, the
valuation of the contract should be independent of the model used.
Available Models
Historically, market participants used the JPMorgan Model for calculating the
upfront cost and unwind Mark-to-Market of CDS contracts. Under the current market
standardisation two new models are available in CDSW:
1. ISDA Upfront Model.

2. ISDA Fair Value Model.
ISDA Upfront Model
ISDA has recommended the use of the ISDA Upfront Model for calculating the
upfront in the standard CDS contracts. The model takes the upfront value of the CDS
contract and, based on a given fixed coupon, calculates the market flat spread that
equates to this upfront. Conversely an investor can take the market (flat spread) quote
for a given coupon and assuming the standard recovery rates – 40% for Senior, 20%
for Sub – can calculate the upfront cost of the contract (Figure 6).
Figure 6: CDSW ISDA Upfront Model
Source: Bloomberg.
If all quotes are based on the same coupon and recovery rate, an investor can easily
compare the different quotes to see which is the most attractive, i.e. which quote
gives them the most attractive upfront amount.
The main difference between this model and the previous J.P. Morgan model is that
the ISDA Upfront Model assumes a single flat spread to the maturity of the contract,
i.e. it assumes a flat CDS curve. The previous model allowed the user to input the
full CDS par spread. The quoted price under the previous model would therefore
depend on the shape of the curve used, while under the ISDA Upfront Model only a
single market spread is needed.
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ISDA Fair Value Model

The ISDA Fair Value Model is similar to the previous J.P. Morgan Model. Both
models rely on the par CDS spreads as an input to calculate the upfront value of the
contract. The small difference between the models is that the previous model
assumed 1 day less of coupon payment in the last coupon payment. This has been
adjusted in the new Fair Value model. The ISDA Fair Value model allows users to
input a full CDS par curve and either mark to market a current contract or calculate
the cash amount to unwind the contract. These two values will differ by three days of
funding since the cash payment is made T+3.
Changing from one model to another
We can convert between the two models in Bloomberg by manipulating the CDSW
screen. We would do this as follows:
1. Price a CDS contract using the full CDS curve, a recovery rate, a 100bp running
coupon and the ISDA Fair Value Model (Figure 7). This will give us the correct
upfront value.
2. To calculate the ISDA Flat spread, change the Mode from “1 – Input Spread” to
“2 – Input Upfront”.
3. Change the Model from ISDA Fair Value to ISDA Upfront. This would keep the
upfront value the same, which is the key, and output the implied ISDA Flat
spread (Figure 6).
In this example, a par spread of 311.76bp for the 5 year maturity is converted into an
ISDA spread of 313.862bp.
Figure 7: CDSW Fair Value
Source: Bloomberg.
There are several contract conventions available in the CDSW screen (Figure 7),
which takes into account the standard trading conventions for different regions such
as Standard European Corporate (STEC), Standard North American Corporate
(SNAC) and Standard Western European Sovereign Contract (SWES). In Table 3 we
highlight the main differences between the ISDA Standard Upfront and the ISDA
Fair Value model:
Table 3: Model Differences
Model Hazard Rates Last Coupon Accrual Accrual on Default Day Valuation Cash Full First
Date Settlement Coupon
1) ISDA Standard Upfront Calculated using single spread endDate - startDate +1 Paid for full day t t+3 Yes
2) ISDA Fair Value Calculated from input Par spreads endDate - startDate +1 Paid for full day t t+3 Yes
Source: J.P. Morgan.; SNAC is Standard North American Contract
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Tranche quoting convention changes

The full report on the Tranche The trading and quoting conventions were changed for index tranches to make them
trading and quoting convention
similar to other products and for easier netting. iTraxx Europe and CDX tranches
changes can be found at New
Trading and Quoting Conventions trade with an upfront plus fixed coupon format. For each tranche, the coupon is same
for iTraxx Tranches for all maturities, chosen from the standard coupons used in single name CDS:
500bp, 300bp, 100bp and 25bp. Table 4 shows the initial coupons used for each
iTraxx Europe tranche. CDX IG9 tranches trade with a fixed coupon of 500bp for
junior tranches and 100bp for senior tranches. Tranches trade with a full first coupon
rather than a stub.
There are no changes in tranche documentation or the other trading conventions apart
from the ones mentioned above. In particular, Big Bang and Small Bang conventions
have applied to tranche trades since they were introduced in 2009.
For iTraxx junior tranches (0-3%, 3-6%, 6-9%) upfronts are quoted whereas flat
spreads are quoted for senior tranches (9-12%, 12-22%, 22-100%). This ensures
consistency with quoting conventions for indices and single name CDS. The ISDA
Upfront Model, available via QCDS in Bloomberg (a simplified version of CDSW),
is used to convert flat spreads into upfronts (and vice-versa) (Figure 8). In particular,
recovery rates of 0% for the 9-12% and 12-22%, and 40% for the 22-100% tranche
are used.
Quoting senior tranches in a flat spread format facilitates their comparison with other
credit instruments trading at similar spread levels. DataQuery, J.P.Morgan’s online
database, shows full running and coupon, as well as traded upfront (given the tranche
coupon) and full upfront (i.e. tranche expected loss).
Table 4: Trading and Quoting formats for iTraxx Europe Standard Tranches
Trading Quoting
Format Comments Coupon (bp)* Format Comments Rec. rate****
0-3% Upfront + Coupon Coupons are the same across all tranche 500 Upfront** For the corresponding coupon
3-6% Upfront + Coupon maturities. They may change in the future 500 Upfront** For the corresponding coupon
6-9% Upfront + Coupon to reflect market spreads (similar to single 300 Upfront** For the corresponding coupon
9-12% Upfront + Coupon name spreads). Available coupons: 25, 100 Flat Spread Similar to CDS and Indices*** 0%
12-22% Upfront + Coupon 100, 300 and 500bp. 100 Flat Spread Similar to CDS and Indices*** 0%
22-100% Upfront + Coupon 25 Flat Spread Similar to CDS and Indices*** 40%
Source: J.P. Morgan. * Initial coupons. ** Clean upfronts will be quoted, i.e. not including the accrued coupon. *** Using ISDA Standard Upfront Model to determine the corresponding upfront, given a
fixed recovery rate. **** Used in ISDA Standard Upfront.
Figure 8: QCDS screen for converting from Flat spreads to upfront plus fixed coupon and vice versa
Source: Bloomberg.
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Central Clearing
Market stress and bank failures in 2009 highlighted the uncertainty surrounding CDS
contracts in which a counterparty failed, as well as the treatment of client margins in
the affected contracts. A clearing house addresses these concerns by acting as a
counterparty to all contracts, segregating client margins and making it much easier
for trade portability.
A CDS clearing house is a financial institution that acts as a central counterparty to

all cleared CDS contracts. In a “cleared” CDS contract, the buyer and seller of
protection face the clearing house, as opposed to each other (as in a bilateral, i.e. “not
cleared”, contract). The CDS clearing house is intended to reduce counterparty risk
and facilitate netting. The result of netting can be as much as 90% reduction in the
notional outstanding with the introduction of a CDS clearing house, according to
InterContinentalExchange (ICE).
Two ICE CDS clearing houses were launched last year: ICE Trust (U.S.) in March
2009 and ICE Clear (Europe) in July 2009. The Chicago Mercantile Exchange
(CME) group began clearing in December 2009. All CDS clearing houses officially
began operations after receiving regulatory approvals from the Fed, SEC, and other
governing bodies. There has been more than $9 trillion CDS gross notional cleared
by ICE1 on a global basis.
The clearing house is set up such that members of the clearing house, dealers and
clearing brokers who meet the membership criteria, face the clearing house rather
than each other. Members are required to post initial margin, maintenance margin
and are also required to contribute to the guaranty fund. Currently, clients’ trades are
cleared through a clearing broker and they do not face the clearing house directly.
The main functions of the clearing house are:
a. The clearing house sets Initial margin and Maintenance margin rules that
govern the collateral that each member posts to the clearing house. These rules
take into account the risk of each member’s portfolio.
b. Trade Portability allows clients to port their trades from one clearing broker to
another, in case the original broker comes under stress.
c. Segregation of client margins The clearing house segregates clients’ margins
from the dealer’s margins and usually maintains them in a Client Omnibus
account.
d. If a member defaults, the clearing house will use margin accounts plus additional
resources known as Guaranty funds to offset the cost of replacing the defaulted
member’s positions with the clearing house.
Consider an example where Dealer A buys $100 of protection on company Z from

Dealer B. After the trade, both dealers face the clearing house instead of facing each
other. As a result, Dealer A has bought $100 of protection from the clearing house
and Dealer B has sold the protection to the clearing house (Figure 9).
1
More information can be found at : https://www.theice.com/
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If Dealer B defaults, the clearing house needs to buy $100 of protection in the market
to re-establish a flat risk position in company Z. The initial and mark-to-market
margins and the guaranty fund posted by Dealer B with the clearing house are
available to offset the costs of doing so. If Dealer B’s collateral is insufficient, then
the guaranty funds from other clearing house members are used. As of March 2010,
ICE Trust and ICE Clear Europe together held guaranty funds of around $3 billion.
Figure 9: Dealers and the Clearing house
Dealer A Dealer B
short risk long risk
Clearing house
Dealer A Dealer B
short risk long risk short risk long risk
Client clearing and Novation

The clearing house helps to segregate and protect client margins and provides ease of
trade portability. If a firm is not a clearing member, they will not directly face the
clearing house. Rather, they can designate one or more clearing members as their
broker of sorts (called derivatives clearing member, or DCM, in the ICE literature).
Consider Figure 10 where Investor X enters into a long risk CDS position facing
Dealer A and Dealer B is the clearing broker for investor X. At the trade inception,
there is a bilateral trade between the Investor and Dealer A. After clearing/novation,
Investor X faces its clearing broker i.e. Dealer B and both dealers face the clearing
house.
Figure 10: Novation: Clients and the Clearing house
Investor X Dealer A
short risk long risk
Dealer B
Investor X Clearing Clearing house Dealer A
Broker long risk
short risk long risk short risk
long risk short risk
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Trade Portability
Although non-members do not face the clearing house directly, they will be able
to port their trades from one member to another more easily, even if their
original dealer is under stress. For example, if a non-member buys $100 of
protection on Credit Z from Dealer A (Figure 10), after clearing it faces its clearing
broker, Dealer B. Should Dealer B come under stress and the investor wishes to port
their trade to another dealer, they should readily be able to do so as the new dealer
would replace the stressed dealer in the deal and the margins will be transferred as
Dealer B transfers both legs of the trade to Dealer C. Thus, the investor no longer
faces the stressed Dealer B but faces Dealer C (Figure 11) and Dealer C does not face
Dealer B, but faces the clearing house once the trade is cleared.
Figure 11: Trade Portability
Dealer B
Investor X Clearing Clearing house Dealer A
Broker long risk
short risk long risk short risk
Dealer C
Clearing
Broker
Client Default
If a client defaults and the clearing member remains solvent and operational, the
clearing member may use the defaulting member’s margin in the Omnibus account at
the clearing house to unwind the client’s position (Figure 12).
Figure 12: A Client defaults
Investor A CDS
Clearing house
Dealer A
CDS Client Omnibus
Investor B Dealer A
Account
• Investor A $
CDS
• Investor B $
• Investor C $
Investor C
ICE Trust (US) currently has 13 clearing members and ICE Clear (Europe) has 14
members. Any firm can become an ICE clearing member. As of now, requirements
include $5bn of Tier 1 capital, a credit rating and a $50mm CDS security deposit.
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DTCC and the Trade Information The Depository Trust & Clearing Corporation (DTCC) provides post trade services
Warehouse like clearing, settlement and also acts as a custodian of securities. The Trade
Information Warehouse, regulated by one of DTCC’s subsidiaries, Warehouse Trust
Company LLC, operates and maintains a database for almost all CDS contracts
outstanding in the market and provides weekly reports on its website on the history
of notional amount of contracts outstanding. According to DTCC, since October
2008, the gross notional outstanding for CDS has dropped from $33.56 trillion to
$24.80 trillion in June 2010 for all credit products combined (Figure 13), whereas the
rolling 4 week average increases in volume traded (considering only new trades) has
increased from $5.4 trillion in April 2009 to around $7.7 trillion in Jun 2010 for the
credit market (Figure 14). We review the definitions of gross and net notional in the
grey box on the next page.
In summary, the credit derivative trading infrastructure is becoming more robust.

According to ICE, it has cleared more than $9 Trillion in CDS contracts globally and
reduced notional value outstanding on the contracts it offers by as much as 90%,
clearly highlighting the extent of netting possible with the introduction of a clearing
house. The increase in volume and decrease in gross notional indicates that the
efforts to improve product documentation and market conventions have been
successful. They’ve not only helped in facilitating netting but have increased the
liquidity in the market as well. The market continues to make progress to improve
CDS trading as more and more contracts are shifted to the clearing house.
Figure 13: Gross Notional outstanding for all credit products Figure 14: Monthly volume (increases) traded for all credit products
$ Trillion. $ Trillion. Rolling 4-week average increases in volume.
34 9.5
32 8.5
30 7.5
28 6.5
26 5.5
24 4.5
Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10
Source: DTCC. Source: DTCC.
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Notional Outstanding
J.P. Morgan publishes a weekly report on CDS Notional Outstanding, which shows the
gross and net notional outstanding data from DTCC. The data is available for single name
CDS, CDS indices and index tranches. We review the definitions for the gross and net
notional outstanding.
Gross Notional Value

Aggregate gross notional value data are calculated on a per-trade basis. For example, a
transaction of $10 million notional between a buyer and a seller of protection is reported as
$10 million gross notional, as opposed to $20 million.
Net Notional Value

Aggregate net notional data is the sum of net protection bought (or equivalently sold)
across counterparty families. In other words, aggregate net notional outstanding data is
calculated by combining net risk exposures taken by all counterparty families. A
counterparty family may include a single account or multiple accounts of the same or
different legal entities, aggregated typically at the holding company or investment manager
level.
Example: Consider a market where there are only four counterparties and their positions
are given in Table 5. The gross notional outstanding in the market is the sum of all long
protection positions or the sum of all short protection positions in the market which is equal
to $465m. The net notional outstanding considers only the net long or short risk position at
a counterparty level, which in this case would be $35m.
Table 5: Aggregate gross notional and net notional data for multiple counterparties
Gross Notional Gross Notional Net Notional of Net Notional of
of CDS of CDS CDS Protection CDS Protection
Protection Sold Protection Sold Bought
Bought
Counterparty Family A ($150,000,000) $135,000,000 ($15,000,000) -
Counterparty Family B ($175,000,000) $200,000,000 - $25,000,000
Counterparty Family C ($90,000,000) $100,000,000 - $10,000,000
Counterparty Family D ($50,000,000) $30,000,000 ($20,000,000) -
Gross Notional ($465,000,000) $465,000,000
Net Notional ($35,000,000) $35,000,000
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Appendix
Appendix A: CDS Determinations Committee
The CDS Determinations Committee (DC) is made up of 15 dealer and non-dealer
investors with the International Swaps and Derivatives Association (ISDA) as the
Secretary and coordinator. The Committee’s purpose is to answer, in a timely
manner, legal and contractual questions about credit derivatives, specifically Credit
Events and Succession Events. The DC also vets and approves the deliverable
obligations list ahead of CDS settlement auctions. If 80% of the members agree on
an issue, the answer is finalised and binding to all CDS contracts. If not, the question
is moved to a three member arbitration panel who will deliver the final answer. The
DC formalises the previous market practice of decision making, in which ISDA
would gather dealers, request feedback from other investors, and debate questions
until consensus answers were determined.
Composition
There are five different Determinations Committees for the different geographical
regions; the Americas, Asia excluding Japan, Japan, Australia-New Zealand and
EMEA (Europe). Each DC has 15 voting members comprised of eight global dealers,
two regional dealers and five non-dealer ISDA members. There is an involved
process of becoming a member and maintaining membership. The rules are designed
to ensure participation in votes and auctions; members are removed from the
committee if they fail to participate in two decisions. Dealers must have certain
amounts of CDS trading volumes to qualify. Non-dealers must have at least $1
billion of assets under management and notional single name CDS exposure of at
least $1 billion.
Questions the Determinations Committee can answer

The Determinations Committee’s main function is to decide if there has been a
Credit Event or Succession Event for credits. If there has been a Credit Event, the
DC will define the terms of the CDS settlement auction and decide which bonds and
loans are eligible obligations. The auction will usually take place within 30 calendar
days of the credit event. During that time, the DC will publish an initial list of
Deliverable Obligations and then has a 10-day period where market participants can
submit bonds and loans to be reviewed by the committee and added to the list should
they meet the criteria.
If there has been a Succession Event the DC will decide the Successor(s). The
Committee will take a minimum of 14 days to review the case before making a
decision.
The DC is able to decide on substitute Reference Obligations. This is relevant if the

original Reference Obligation is no longer outstanding and it is unclear what the
replacement obligation should be. Additionally, the DC can determine if there is a
merger between a Reference Entity (the credit the CDS contract “points” to) and a
protection seller (an investment bank, for example). In this infrequently occurring
case there are rules as to how trades can be unwound. Finally, there is a catch-all
provision that allows the committee to vote on any “matter of contractual
interpretation relevant to the credit derivatives market generally.”
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Procedures
Any market participant can submit a question to the DC through the ISDA website,
along with the relevant publicly available information needed to review the question.
The questions and submitted documentation are posted on www.isda.org/credit. The
DC Secretary will notify the Committee of the question who then decides whether to
reject, accept, or transfer the question to another region’s DC. If the question is
accepted, the meeting schedule will be posted on the website. The content of the
deliberations is confidential while questions are being reviewed. After votes are
taken, the identity and vote of each member is published along with the result. If the
question obtains an 80% supermajority, the decision of the DC is final. If not,
the question moves into arbitration. In general, Credit Event decisions must be
made in two days and Succession Event decisions in two weeks. The DC has the
ability to vote to extend the timeframe.
Arbitration Panel
If the DC fails to reach an 80% supermajority, the question moves to an External
Review panel, a three member panel of independent experts hired by ISDA to make
binding decisions. For a given question, the independent experts will submit written
arguments to the panel, followed by oral arguments. Within 14 days the decision will
be published unless the DC votes to extend the timeframe. A unanimous vote from
the External Review panel is required to overturn a DC decision that had more than
60% but less than 80% of the votes. Two out of three votes from the External Review
panel are sufficient if the original DC decision had less than 60% of the votes. The
result of voting and an explanation of the decision are published on the ISDA
website. If new information becomes available during the arbitration the DC can take
back the question and decide the matter outside of arbitration.
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Appendix B: Credit Events and Restructuring Standards

We look at the CDS standards in different geographies in Table 6. We discuss each
of the four main characteristics of a standard CDS contract.
Credit Events
A credit event triggers a contingent payment on a credit default swap. Credit events
are defined in the 2003 ISDA Credit Derivatives Definitions and include the
following:
• Bankruptcy: includes insolvency, appointment of administrators/liquidators,
and creditor arrangements.
• Failure to pay: payment failure on one or more obligations after expiration of
any applicable grace period; typically subject to a materiality threshold (e.g.,
$1million for North American CDS contracts).
• Restructuring: refers to a change in the agreement between the reference entity
and the holders of an obligation (such agreement was not previously provided
for under the terms of that obligation) due to the deterioration in
creditworthiness or financial condition to the reference entity with respect to:
o reduction of interest or principal
o postponement of payment of interest or principal
o change of currency (other than to a “Permitted Currency”)
o contractual subordination
Note that there are several versions of the restructuring credit event that are used
in different markets. We discuss these later in this section.
• Repudiation/moratorium: authorised government authority (or reference
entity) repudiates or imposes moratorium and failure to pay or restructuring
occurs.
• Obligation acceleration: one or more obligations become due and payable as a
result of the occurrence of a default or other condition or event described, other
than a failure to make any required payment.
While bankruptcy, failure to pay and restructuring constitute credit events for
Standard European and North American Corporates, failure to pay,
repudiation/moratorium and restructuring constitute credit events for Standard
Western European Sovereigns.
Obligation Category and Obligation Characteristics

Obligation Category and Obligation Characteristics define the obligation on which a
credit event needs to occur for the CDS contracts to be triggered. As an example, a
failure to pay on a subordinated bond or a bond issued under domestic law is not
considered a credit event for the Standard Emerging European Corporates.
Deliverable Obligation Characteristics

This section of Table 6 describes the characteristics of obligations which are
deliverable into the auction following a credit event. Although failure to pay on a
subordinated bond is considered a credit event in the Standard European Corporate
and Standard North American Corporate contracts, they are not deliverable in the
auction for that credit event.
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Table 6: Standard CDS contracts for different regions as of June 2010

Transaction EUROPEAN CORPORATE NORTH AMERICAN WESTERN EUROPEAN EMERGING EUROPEAN EMERGING EUROPEAN & ASIA SOVEREIGN
Type CORPORATE SOVEREIGN CORPORATE MIDDLE EASTERN
SOVEREIGN
Credit Events: Bankruptcy Bankruptcy Failure to Pay Bankruptcy Failure to Pay Failure to Pay
Failure to Pay Failure to Pay Repudiation/Moratorium Failure to Pay Grace Period Extension: Repudiation/Moratorium
Restructuring Restructuring, if specified as Restructuring Grace Period Extension: Applicable Applicable Restructuring
Modified Restructuring Maturity applicable in the relevant Obligation Acceleration Obligation Acceleration
Limitation and Conditionally Confirmation Repudiation/Moratorium Repudiation/Moratorium
Transferable Obligation Restructuring Maturity Limitation Restructuring Restructuring
Applicable and Fully Transferable Obligation Multiple Holder Obligation: Multiple Holder Obligation: Not
Applicable a) Not Applicable with Applicable
respect to Obligation
Category “Bonds”
b) Applicable with
respect to Obligation
Category “Loans”
Obligation Borrowed Money Borrowed Money Borrowed Money Bond or Loan Bond Bond or Loan
Category:
Obligation None None None Not Subordinated Not Subordinated Not Subordinated
Characteristics: Not Domestic Law Not Domestic Currency Not Sovereign Lender
Not Domestic Currency Not Domestic Law Not Domestic Currency
Not Domestic Issuance Not Domestic Issuance Not Domestic Law
Not Domestic Issuance
Deliverable Not Subordinated Not Subordinated Specified Currency Not Subordinated Not Subordinated Not Subordinated
Obligation Specified Currency Specified Currency Not Contingent Specified Currency Specified Currency Specified Currency
Characteristics: Not Contingent Not Contingent Assignable Loan Not Domestic Issuance Not Domestic Law Not Sovereign Lender
Assignable Loan Assignable Loan Consent Required Loan Not Contingent Not Contingent Not Domestic Law
Consent Required Loan Consent Required Loan Transferable Transferable Not Domestic Issuance Not Contingent
Transferable Transferable Maximum Maturity: 30 years Not Bearer Transferable Not Domestic Issuance
Maximum Maturity: 30 years Maximum Maturity: 30 years Not Bearer Assignable Loan Not Bearer Assignable Loan
Not Bearer Not Bearer Consent Required Loan Transferable
Not Domestic Law Maximum Maturity: 30 years
Not Bearer
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Restructuring Standards
The 2003 ISDA Credit Derivatives Definitions specify four different types of
restructuring standards:
1. Modified Modified Restructuring (MMR),

2. Modified Restructuring (MR),
3. Old Restructuring (Old R) and
4. No Restructuring (NR).
While Standard European Corporates trade with MMR as the restructuring standard,
Standard North American Corporates have NR and Sovereign (both Western
European and European EM) and EM Corporates trade with the Old-R restructuring
standard. We review each of these restructuring standards in this section.
Modified Modified Restructuring Limitation (MMR)

The MMR limitation means that even though the protection buyer is protected from
restructuring credit events, there are restrictions on the maturity of the obligations
deliverable into the contract. There are eight possible “maturity buckets”, depending
on the maturity of the CDS contract and whether the buyer or the seller of protection
has triggered the contract. Each bucket shows the maturity limitation of the
deliverable obligations that can be delivered into the CDS auction (Table 7). This is
now the standard for European contracts.
Table 7: Modified Maturity limitation buckets

Remaining maturity of CDS: Auction obligations:
<2.5 years Restructured obligations up to 5 yrs
Non restructured obligations up to 2.5 yrs
15 to 20 years Restructured and non restructured obligations up to 20 yrs
>20 years or Protection Seller trigger Restructured and non restructured obligations up to 30 yrs
If the protection buyer triggers the contract, the contract is entered into the bucket
corresponding to the maturity of the CDS contract. For each bucket, shown in Table
7, the deliverable obligations are restricted by a maximum maturity corresponding to
that bucket. For example a protection buyer with a CDS contract maturity falling due
within the 2.5 to 5 year bucket will be able to deliver any obligation up to 5 years.
Any contract longer than 20 years will be entered into the >20 year bucket.
These restrictions apply only in the case where the buyer of protection triggers the
contract. If the seller of protection triggers the contract, then anything out to 30 years
is deliverable.
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The reason for limiting the maturity of deliverable obligations is to ensure that the
payout from a restructuring event is economically fairly priced relative to the
underlying bonds. Suppose an investor has three-month protection and a bond which
is due for a principal payment is restructured. The bond price would adjust to reflect
the restructuring. However, there may also be a 25 year bond from the same
company that is trading significantly below the short-dated bond. If the buyer of
protection were able to deliver this longer dated bond into the contract, they would
be at an economic advantage since the two bonds would not be trading at the same
price. This is generally not the case for other credit events such as bankruptcy and
failure to pay, where all bonds tend to price at similar levels irrespective of their
maturity after the credit event.
Modified Restructuring Limitation (MR)

MR applies the maturity limitation for determining the relevant deliverable
obligations by using maturity buckets similar to the MMR standard. MR and MMR
standards are the same except:
• First Maturity Bucket: While the first maturity bucket for MMR had an
end date of 2.5 years for other obligations and 5 years for the restructured
obligations, MR has a maturity bucket end date of 2.5 years for all
obligations.
• Transferable Obligations: MR allows only fully transferable obligations to

be delivered, whereas MMR does allow conditional obligations to be
delivered. This limitation usually rules out most loans for delivery into MR
auctions.
Old Restructuring (Old R)

Since maturity limitations do not apply in the Old R standard, there are no maturity
buckets and there is a single auction where all deliverable obligations can be
delivered.
No Restructuring (NR)
Restructurings do not constitute a credit event under the NR restructuring standard.
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Appendix C: Auction Process

The following represents our The Standard Contract and the Auction
interpretation of the ISDA The auction process is now hard-wired into CDS contracts: All contracts are entered
auction protocol but ISDA
remains the authority. See
into the auction following a credit event, except for a restructuring credit event where
www.isda.org for full details of investors still have an option not to trigger the contract.
the auction process.
For the auction process, investors can opt for either cash or physical settlement.
Investors who wish to cash settle their contracts do not need to do anything else and
use the final price from the auction to settle their contracts. Investors who would like
to physically settle their contracts by delivering bonds into the auction need to notify
their dealer that they would like to do so.
The auction process has two aims:
1. Facilitate cash settlement of CDS contracts.

2. Preserve the economics of physical settlement. As with the standard contract,
the auction aims to preserve the cheapest-to-deliver option that the protection
buyer has.
Bearing in mind the aims of the auction, we now turn to how it is conducted.
The Auction Process is a Two-Step Process

The auction is designed as a two-step process in the first stage of which an indicative
recovery rate is set along with the outstanding notional of bonds to be physically
settled. In the second stage, market participants can buy or sell bonds depending on
the net open interests of the first round and the final recovery rate is set. This final
recovery rate is used for all bonds and CDS positions that are entered into the
auction.
For investors who wish to cash settle their CDS positions and do not wish to buy or
sell bonds through the auction, they do not need to do anything. The contract is
automatically triggered and the final auction price will determine the recovery on the
CDS. They will receive or pay a cash amount based on this recovery.
CDS Market participants who have bonds to buy or sell can use the auction to do so
in either step 1 or step 2. In step 1, investors who have CDS positions can enter a
market order to buy or sell bonds at the final price determined by the auction. In step
2, any market participant, irrespective of whether they held CDS, can enter limit
orders to buy or sell bonds, depending on the net open interests from the first step.
We now describe each step in greater detail. In both steps, investors submit orders
through the CDS market makers participating in the auction.
Step 1A: Determining the indicative price (Inside Market Midpoint)

Market makers submit a bid and offer price for the bonds in a predetermined size
which is usually - €5m for the senior auction and €2m for the sub auction. The
maximum bid-offer that can be submitted by the market makers is decided by the
Determinations committee. It is usually 2%, but could vary. These levels are not
traded in the first step of the auction, but may be in the second step. As an example,
consider dealers A to H who submit the bids and offers shown in Table 8.
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The auction administrator will then order the bids they receive from the highest to
lowest and the offers they receive from lowest to highest (Table 9). Any market that
crosses is deemed a tradable market and excluded from the price determination. In
the example in Table 9, dealer D is willing to buy bonds at 45 and Dealer E is willing
to sell at 34. These markets cross and are therefore excluded. In the example in Table
9 (bold) – the first three rows are all excluded. The indicative price is then calculated
using the best half of the remaining valid markets. In our example, five valid markets
remain and the best three are used (shaded).
The IMM (Inside Market Midpoint) is the average of these best markets and is
40.625 in our example.
Table 8: Dealers Submit Bids and Offers … Table 9: … these are ordered from highest bid and lowest offer
Dealer Bids Offers Dealer Bids Offers Dealer
A 39.5 41 D 45 34 E
B 40 42 C 41 39.5 G
C 41 43 H 41 40 F
D 45 47 B 40 41 A
E 32 34 A 39.5 42 B
F 38.75 40 F 38.75 42.75 H
G 38 39.5 G 38 43 C
H 41 42.75 E 32 47 D
Source: J.P. Morgan Source: J.P. Morgan
Step 1B: Determining the open interests to buy or sell bonds

At the same time that the market makers submit their bids and offers to determine the
IMM, they also submit the net amount of bonds that they wish to buy or sell in the
form of Market Orders. These are the combined positions of their own as well as
clients who are entering the auction through their dealer. For example a dealer might
wish to buy €100m of bonds in the auction and has a client order to sell €30m of
bonds. They would enter a net Market Order to buy €70m. As an example, consider
the open interests shown in Table 10, there are €450m sell orders and €150m buy
orders. The net position is therefore €300m of sell orders. Clients and dealers can
only submit market orders up to their net notional of CDS at this stage.
Table 10: Dealers submit Open Interests to Buy or Sell Bonds

Dealer Bid/Offer Size
A Offer 100
B Offer 200
C Offer 10
D Offer 40
E Offer 50
F Offer 50
G Bid 20
H Bid 130
Source: J.P. Morgan
At this point the auction administrator has the IMM 40.625 as well as the net open
interests. They will publish this on the website (www.creditfixings.com) along with
Table 8 and Table 10.
In order to ensure that dealers do not manipulate the first round of the auction, a
penalty is applied to any dealer who provides a tradeable market in Step 1A against
the net open interests. In our example, the net open interest was to sell bonds, so
dealers D, C and H, who entered tradeable markets are penalised for bidding too
high. (Those offering bonds too low would not be penalised since the net open
interests is to sell bonds and it is reasonable that they should be offering low prices.)
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The penalty applied is equal to the difference between the tradeable price and the
IMM times the notional. This is paid to the auction administrator to pay for the costs
of running the auction. The dealer that is penalised along with the penalty is
published on the website.
Step 2: Finding the Final Price through Limit Orders

We now have the indicative price of the auction as well as the net open interests,
both of which are published on the website. Market participants can now enter Limit
Orders to hoover up the open interests. Continuing our example, the open interests
was to sell bonds, so market participants are invited to buy bonds through their
dealers in a Dutch auction. The lowest price at which the open interests clear is the
final price for all CDS and bonds entered into the auction. (If the open interests had
been to buy bonds, then the highest offer to sell bonds would be the final price.)
Let’s suppose that the bids in Table 11 are submitted as Limit Orders in the Dutch
auction. Note that the dealer bids from step 1A are also entered into the auction in the
original size, with the penalised dealers being entered at the IMM. Since the price of
38.875 is the lowest bid to hoover up the open interest, this is the Final Price. This
Final Price applied to all trades, both CDS and bonds, that traded in the auction.
Table 11: The lowest Bid to clear the Open Interests is the Final Price
Dealer Bid Size
D* 40.625 5
C* 40.625 5
H* 40.625 5
B* 40 5
A* 39.5 5
G 39.625 75
F 39.375 80
C 39.125 100
A 38.875 70
F* 38.75 5
C 38.375 10
Source: J.P. Morgan, *Indicates bid carried over from Step 1
Note that in the case where the open interest is to sell bonds, the Final Price is capped
below at 0 and above at half the maximum bid-offer above the IMM. This ensures
that bonds are not artificially bid up in the second step of the auction in order to
achieve a high recovery rate.
Having seen how the auction process works, we now look at how it can be used
through some examples. As we will show in the examples, the auction fulfils the two
aims that we highlighted earlier:
1. Facilitate cash settlement of CDS contracts
2. Preserve the economics of physical settlement
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Example 1: Investor owns bonds and has bought protection

Suppose an investor has a basis package in which they have bought bonds and
bought CDS protection against this position. Suppose they wish to exit their bonds at
par, so enter the auction and put in a market order to sell bonds. If the final price is
30, they will receive 70 to terminate the CDS and will also receive 30 from selling
bonds in the auction. The net result is that they have received par for their bonds and
have replicated physical settlement.
Should the investor enter a market order or a limit order?

The answer to this depends on the investor’s view and risk tolerance. If they want to
guarantee receipt of par and the sale of the bond then they should enter a market
order. By not doing so they run the risk that the open interest in the auction is to sell
bonds. If this is the case, they will not be able to enter a Limit Order to sell bonds. If
liquidity dries up or the price continues to fall post the auction, they may not be able
to sell bonds into the market. However, if they believe that bonds are likely trade
higher post the auction then they may wish to hold onto their position and sell it later.
Example 2: Investor has sold protection

Suppose the investor has sold protection and wants to use the auction to cash settle
their position. They do not want to own the bonds post the auction, so do not submit
a market order to buy bonds. If the auction settles at 30, they will pay 70 to terminate
the contract.
Example 3: Investor has no CDS position but owns bonds that they want to sell
Suppose an investor has a bond position which they wish to sell, but no CDS. If the
open interest in the auction after the first step is to buy bonds then they can submit
limit orders via their dealer to sell bonds. The price they will receive will be the final
price of the auction.
For a restructuring credit event where the maturity limitation is applicable, such
auctions are held for each bucket separately and each bucket has its own recovery.
In the next section, Appendix D, we look at the Thomson restructuring and the
lessons learnt from its auction.
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Appendix D: Auction Case Study - Thomson Restructuring

Thomson’s restructuring credit event was the first restructuring event following the
introduction of the “Big Bang” and “Small Bang” protocols and also the first
significant restructuring credit event in Europe. As such, it proved to be a test case
for both protocols as well as the auction process itself. We look at not only the effect
of these protocols, but also general lessons learnt from the Thomson restructuring
and the auction.
Our overall view is that the process worked well and that the protocols improved
rather than detracted from the market’s ability to settle CDS contracts following the
credit event. By focusing liquidity at a single point in time, the market was able to
absorb the large net open interest to sell bonds despite thin trading volumes in the
deliverable obligation prior to the auction.
Nevertheless, we think there are many lessons to be learnt from the Thomson
restructuring event and we highlight the areas where we believe investors in CDS
need to be aware of as well as the potential risk areas for future restructuring events.
The final recovery rates for the three buckets were 96.25, 65.125 and 63.25
respectively for the 2.5y, 5y and 7.5y buckets. These recovery rates differed from the
recovery expectation prior to the auction as well as the initial recovery set during the
first round of the auction. This was due to the demand and supply dynamics of the
auction.
Below we highlight some of the main lessons learnt from the restructuring credit
event and the auction process. Many of these are not new or particular to
restructuring events, but were merely brought to the fore by the Thomson event.
Lessons learnt before the credit Maturity Matters – Be aware of the CDS maturity date and whether there are
event deliverable bonds maturing before this date.
One of the most important lessons from the restructuring event was that maturity
matters. This was not something new to CDS contracts, but was brought to the fore
following the credit event. Since a restructuring credit event invokes a maturity
limitation to CDS contracts, where the recovery rate of the CDS is determined by the
bonds maturing before the maturity of the CDS, investors hedging bonds or loans
with CDS need to be aware that their CDS hedges need to cover the maturity of the
bond they are hedging. Additionally, investors that do not hold bonds also need to be
aware of the bonds maturing before the maturity date of their contract. While
hedging longer dated bonds with shorter CDS may be cost effective, it may not offer
protection against restructuring credit events.
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Coupons and Upfronts – CDS coupons will determine the present value of the trade
and the annuity or Jump-to-Default risk. Investors with high upfront values may wish
to consider monetising the upfront and resetting the position at a higher coupon.
CDS contracts that trade away from their coupons can have large positive or negative
upfront values. Investors owning these contracts have large annuity risk, or Jump-to-
Default risk. An investor who has bought protection and is very much in the money
could lose money from a credit event if the recovery rate is such that the payout from
the auction is less than present value of the contract. In Table 12 we show some
upfront amounts assuming a 30bp coupon and differing post auction CDS market
spreads.
Assuming, a protection buyer has a 30bp coupon Jun-13 contract and he expects the
post auction spread to be 800bp and the recovery in the auction to be 75%. Table 12
shows that the upfront on the contract after the auction would be 22.12% i.e. his
contract would be worth 22.12%, whereas in the auction his contract would be worth
25% based on a recovery assumption of 75%. So based on these assumptions and
calculations, it is profitable for the protection buyer to trigger the contract and
receive 25% of the notional.
Table 12: Upfront Assuming 30bp Coupon, 40% recovery and post auction spread
400 600 800 1000
20-Jun-10 2.58% 3.93% 5.24% 6.53%
20-Dec-10 4.32% 6.53% 8.65% 10.68%
20-Jun-11 5.99% 8.97% 11.78% 14.44%
20-Dec-11 7.58% 11.27% 14.70% 17.88%
20-Jun-12 9.11% 13.43% 17.38% 21.00%
20-Dec-12 10.56% 15.46% 19.86% 23.82%
20-Jun-13 11.93% 17.34% 22.12% 26.35%
20-Dec-13 13.24% 19.11% 24.21% 28.66%
20-Jun-14 14.48% 20.75% 26.12% 30.73%
20-Dec-14 15.66% 22.29% 27.89% 32.61%
20-Jun-15 16.78% 23.72% 29.49% 34.29%
20-Dec-15 17.84% 25.06% 30.97% 35.82%
20-Jun-16 18.85% 26.31% 32.33% 37.19%
20-Dec-16 19.80% 27.47% 33.57% 38.43%
20-Jun-17 20.70% 28.55% 34.70% 39.54%
20-Dec-17 21.55% 29.55% 35.74% 40.54%
20-Jun-18 22.36% 30.48% 36.69% 41.44%
20-Dec-18 23.12% 31.36% 37.56% 42.25%
Source: J.P. Morgan
Lessons learnt after the credit Buyer and Seller triggers matter – Restructuring is not a hard credit event and
event recovery can be different if the buyer or seller triggers
In a bankruptcy or failure to pay credit event, all CDS contracts trigger and enter the
auction automatically following the “Big Bang” protocol. On a restructuring event
however an optional trigger exists, which allows either the buyer or the seller to
trigger. If the buyer triggers, the maturity limitation applies, however if the seller
triggers, no maturity limitations apply and the trade enters the auction for the longer
dated bucket.
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To Trigger or Not to Trigger? – Investors should only trigger contracts where it

is economically viable for them to do so
Should investors trigger their contracts or not? This is an economic decision based on
the expected present value of the untriggered contract post the auction versus the
expected payoff in the auction (1-Recovery). If the present value of the contract is
expected to be 20% following the auction, the investor is unlikely to trigger the
contract if they will only receive 10% from the auction. While neither of these is
known prior to the auction, an investor can get a sense of whether one option is more
or less valuable than the other. This economic assessment should be the main input
into their decision although the operational cost of holding an untriggered CDS
should also be considered.
Liquidity – liquidity exists to close out positions prior to an auction, but can at
times be limited.
CDS liquidity following the announcement of a credit event exists and can be used to
close out of contracts. In the case of Thomson, CDS traded throughout the process
generally with a 2-4% bid/offer for the 5-year and 3-5% bid/offer at the 1-year.
Investors who did not want to go through the auction process were therefore able to
close out of their positions.
Lessons learnt during the Open Interests and Buyers versus Sellers – Liquidity focus on the auction day
auction can be a double-edged sword
The CDS auction focuses liquidity on a single day for investors looking to buy and
sell bonds and loans of the defaulted company. This focus of liquidity can be very
beneficial as all buyer and sellers meet at a single point. At the same time however,
large interest to buy or sell bonds at a single point in time can also move the market
suddenly. Investors using the auction should think about how these demand and
supply imbalances could affect the final recovery.
Initial and Final Recovery – Initial and Final recovery can differ due to the net
open interests
In the Thomson auction, the initial recovery differed from the final recovery by 17
points for the longer dated bucket, 15 points in the middle bucket and 5 points in the
shortest dated bucket. While these are large, they are not unprecedented; for
example, the BRADBI auction settled 9 points above the initial price while Lyondell
was 8 points below the initial recovery. This risk is mitigated for investors who have
bonds or loans to deliver into the auction, as they are indifferent to recovery, but is a
risk for investors looking to cash settle their positions.
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Non-CDS Users – Liquidity on the auction day allows Non-CDS users to

participate
While CDS auctions are used to settle CDS contracts, they also allow non-CDS users
to access the liquidity provided by the auction. In the case of Thomson, some CDS
users had large interests to buy or sell bonds and loans with matched CDS positions.
Non-CDS users can use the auction as an opportunistic time to buy or sell the
deliverables through limit orders at a price they are happy to pay and may even get
better than this price. For example, Structured Credit Vehicles require bonds to
deliver in their own customised contracts with structured credit investors, hence they
use the auction to buy bonds (Figure 15).
Figure 15: Dealers with structured credit vehicles
Dealer
Structured Structured
Credit Credit
CDS Market Vehicle Investor
long risk
short risk short risk
long risk
Standard CDS Customized CDS

Contract Contract
Source: J.P. Morgan
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39
(44-20) 7325-3699 01 July 2010
Harpreet Singh
(91-22) 6157-3279
JP Morgan European Credit Research

Head of European Credit Research & Strategy
Stephen Dulake Team Assistant
www.morganmarkets.com/analyst/stephendulake Laura Hayes
125 London Wall (44 20) 7777-2280
6th Floor laura.x.hayes@jpmorgan.com
London EC2Y 5AJ
High Grade and High Yield Research Groups

General Industrials Emerging Market Corporates ABS & Structured Products
Nitin Dias, CFA Allison Bellows Tiernan, CFA Rishad Ahluwalia
(44-20) 7325-4760 (44 20) 7777-3843 (44-20) 7777-1045
nitin.a.dias@jpmorgan.com allison.bellows@jpmorgan.com rishad.ahluwalia@jpmorgan.com
www.morganmarkets.com/analyst/nitindias www.morganmarkets.com/analyst/allisonbellowstiernan www.morganmarkets.com/analyst/rishadahluwalia
Ritasha Gupta Zafar Nazim Gareth Davies, CFA

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(44-20) 7742-7344 (44-20) 7325-6823 (44-20) 7777-4461
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Nirav Bhatt Katie Ruci Advait Joshi
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alketa.ruci@jpmorgan.com
www.morganmarkets.com/analyst/katieruci TMT – Telecoms/Cable, Media & Technology
Credit Derivatives & Quantitative Research David Caldana, CFA
Saul Doctor Raman Singla (44-20) 7777 1737
(44-20) 7325-3699 (44-20) 7777-0350 david.caldana@jpmorgan.com
saul.doctor@jpmorgan.com raman.d.singla@jpmorgan.com www.morganmarkets.com/analyst/davidcaldana
www.morganmarkets.com/analyst/sauldoctor www.morganmarkets.com/analyst/ramansingla
Andrew Webb
Abel Elizalde Financials (44-20) 7777 0450
(44-20) 7742-7829 Roberto Henriques, CFA andrew.x.webb@jpmorgan.com
abel.elizalde@jpmorgan.com (44-20) 7777-4506 www.morganmarkets.com/analyst/andrewwebb
www.morganmarkets.com/analyst/abelelizalde roberto.henriques@jpmorgan.com
www.morganmarkets.com/analyst/robertohenriques Malin Hedman
Support Analyst (44-20) 7325 9353
Harpreet Singh Christian Leukers, CFA malin.b.hedman@jpmorgan.com
harpreet.x.singh@jpmorgan.com (44 20) 7325-0949 www.morganmarkets.com/analyst/malinhedman
christian.leukers@jpmorgan.com
Credit Strategy www.morganmarkets.com/analyst/christianleukers Support Analyst
Stephen Dulake Amir Kumar
(44-20) 7325-5454 Autos & Chemicals amir.x.kumar@jpmorgan.com
stephen.dulake@jpmorgan.com Stephanie Renegar
www.morganmarkets.com/analyst/stephendulake (44-20) 7325-3686 Energy and Infrastructure
stephanie.a.renegar@jpmorgan.com Olek Keenan, CFA
Daniel Lamy www.morganmarkets.com/analyst/stephanierenegar (44-20) 7777-0017
(44-20) 7777-1875 olek.keenan@jpmorgan.com
daniel.lamy@jpmorgan.com Danielle Ward www.morganmarkets.com/analyst/olekkeenan
www.morganmarkets.com/analyst/daniellamy (44-20) 7742-7344
danielle.x.ward@jpmorgan.com Ryan Staszewski
Tina Zhang www.morganmarkets.com/analyst/danielleward (44-20) 7777-1981
(44-20) 7777-1260 ryan.m.staszewski@jpmorgan.com
tina.t.zhang@jpmorgan.com Support Analyst www.morganmarkets.com/analyst/ryanstaszewski
www.morganmarkets.com/analyst/tinazhang Nirav Bhatt
nirav.x.bhatt@jpmorgan.com
www.morganmarkets.com/analyst/danielleward
Research Distribution
To amend research distribution, please contact Laura Hayes our Credit Research Administration, contact details above.
J.P. Morgan research is available at http://www.morganmarkets.com
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o CDS clearing - Central clearing has been introduced to reduce

• Risk reduction and liquidity improvement - Data from DTCC shows

Source: DTCC. Source: DTCC.

See page 37 for analyst certification and important disclosures.

CDS Documentation – The main changes in the CDS documentation were

CDS Documentation Changes

Big Bang Protocol

1. A CDS Determinations Committee has been established to determine

2. Settlement of CDS contracts upon a credit event is through the CDS

Trading date Today Maturity date

Source: J.P. Morgan.

Trading date Today Maturity date

Source: J.P. Morgan.

Small Bang Protocol

Restructuring under the Small Bang

Table 2: Modified Maturity limitation for restructuring under Small Bang

The Rounding Down Convention

Restructuring and Index products

Trading and Quoting Conventions

Trading with upfront plus fixed coupon

Figure 5: Trading on a par spread format - Example

Source: J.P. Morgan.

In the current market convention, trading is done on an upfront plus fixed

Standard trading convention in Europe now provides liquidity at six coupons

Full first coupon

1. ISDA Upfront Model.

Figure 6: CDSW ISDA Upfront Model

ISDA Fair Value Model

Tranche quoting convention changes

A CDS clearing house is a financial institution that acts as a central counterparty to

The main functions of the clearing house are:

Consider an example where Dealer A buys $100 of protection on company Z from

Figure 9: Dealers and the Clearing house

Source: J.P. Morgan.

Client clearing and Novation

Source: J.P. Morgan.

Figure 11: Trade Portability

Source: J.P. Morgan.

Figure 12: A Client defaults

Source: J.P. Morgan.

In summary, the credit derivative trading infrastructure is becoming more robust.

Source: DTCC. Source: DTCC.

Gross Notional Value

Net Notional Value

Questions the Determinations Committee can answer

The DC is able to decide on substitute Reference Obligations. This is relevant if the

Appendix B: Credit Events and Restructuring Standards

Obligation Category and Obligation Characteristics

Deliverable Obligation Characteristics

Table 6: Standard CDS contracts for different regions as of June 2010

1. Modified Modified Restructuring (MMR),

Modified Modified Restructuring Limitation (MMR)

Table 7: Modified Maturity limitation buckets

Modified Restructuring Limitation (MR)

• Transferable Obligations: MR allows only fully transferable obligations to

Old Restructuring (Old R)

Appendix C: Auction Process

The auction process has two aims:

1. Facilitate cash settlement of CDS contracts.

The Auction Process is a Two-Step Process