ISDA Big Bang Protocol

CDS Small Bang:
Understanding the Global

Contract & European
Convention Changes
July 20th, 2009

CDS Small Bang: Understanding the Global Contract & European Convention Changes
Contents
Executive Summary............................................................................................................................................................ 3
Introduction: Why Have a CDS Small Bang?................................................................................................................... 5
Expected Global Contract Changes ................................................................................................................................. 7
Expanding the Role of the Determinations Committees to Auctions for Restructuring Events........................................ 7
Auctions for Restructuring Events .................................................................................................................................... 8
Matching Deliverables to Maturity Buckets .................................................................................................................. 9
Matching Transactions to Maturity Buckets and The Rounding Down Convention..................................................... 9
To Auction or Not to Auction and the “300/5” Criteria................................................................................................ 10
Movement Option....................................................................................................................................................... 10
Comparing Mod Mod R and Mod R ........................................................................................................................... 11
Old R Auctions ........................................................................................................................................................... 11
“Use It or Lose It”............................................................................................................................................................ 11
European CDS Convention Changes ............................................................................................................................. 13
Fixed Coupons ............................................................................................................................................................... 13
Trading with a Full Coupon ............................................................................................................................................ 13
Restructuring Clause Convention................................................................................................................................... 13
Quoting Conventions ....................................................................................................................................................... 14
New Runs ....................................................................................................................................................................... 14
Markit CDS Converter and ISDA CDS Standard Model................................................................................................. 15
Treatment of Markit iTraxx and CDX EM Index Trades ................................................................................................. 17
Indices ............................................................................................................................................................................ 17
Tranches......................................................................................................................................................................... 19
Migration of Old Contracts to New Contracts/Conventions......................................................................................... 20
Global Contract Changes ............................................................................................................................................... 20
Small Bang Protocol................................................................................................................................................... 20
2009 Restructuring Supplement to the 2003 ISDA Credit Derivatives Definitions .................................................... 20
DC Committee Rules ................................................................................................................................................. 20
European Convention Changes ..................................................................................................................................... 20
Portfolio Recouponing................................................................................................................................................ 20
Conclusion ........................................................................................................................................................................ 22
Appendix: History and Definitions of Restructuring..................................................................................................... 23
Copyright © 2009, Markit Group Limited. All rights reserved. www.markit.com 2

Executive Summary
The CDS Small Bang is a natural extension of the CDS Big Bang. The Big Bang entailed global contract changes as
well as convention changes in North American contracts. The CDS Big Bang protocol gave investors the option of
adhering to the protocol to have the global contract changes apply to their existing positions. By launch, over 2,000
accounts had elected to adhere to the protocol—an overwhelming vote of confidence in the industry’s efforts to facilitate
the creation of more standardized contracts. Our prior report “Understanding the CDS Big Bang: Global Contract
Changes and North American Convention Changes” discussed these changes in detail and can be found at
www.markit.com/cds. We expect the CDS Small Bang to be similarly successful for Europe.
Why is the CDS Market Changing?

The industry is extending contract standardization to other aspects of the CDS markets. The CDS Small Bang entails
contract changes related to Restructuring, alongside separate convention changes to the European corporate CDS
market and Western European Sovereign CDS trades. For clarity, the contract changes will also apply to the handling of
any outstanding CDS trades globally that have some form of restructuring specified. The motivations for the convention
changes in European contracts are similar to the ones in the North American conventions—facilitate central clearing,
gain efficiencies in trade and operational processing, and reducing the gross notional amount outstanding in the market.
The convention changes were implemented in Europe on June 20th, 2009 (June 22nd was the first trading day). Contract
changes are scheduled in advance of July 31, 2009 – the commitment date made by dealers to the European
Commission to begin central clearing in Europe.
Global Contract Changes

On April 8th, the Big Bang Protocol went into effect, hardwiring the auction mechanism, creating Determinations
Committees with the responsibility to declare whether a credit or succession event has occurred. It also introduced the
concept of rolling effective dates with “lookback” periods defining credit event and succession event protection.
Simultaneously with the global contract changes, North American corporate single names started trading with fixed
coupons and a full first accrual period.
While CDS Big Bang authorized the Determinations Committees (DC) to decide whether or not a Restructuring Event
took place, the DC rules under the CDS Big Bang specifically prohibited them from authorizing auctions to settle trades
for Restructuring Events due to the complications cited in this report. The CDS Small Bang addresses the need to
incorporate the auction settlement mechanism for Restructuring Events.
Under the current restructuring definitions there is significant optionality in determining a settlement price due to eligibility
of deliverable obligations based on whether the buyer or seller triggers the contract, the maturity date, and whether
restructured or other obligations are being delivered. In order to determine an appropriate cash settlement price for all
contracts under a reference entity in a Restructuring Credit Event, an auction might be required for every outstanding
CDS maturity date. This is not practicable for both operational reasons and the considerable cost associated with
conducting a large number of auctions. The major benefit and thrust of the CDS Small Bang is to ensure that the
auction settlement mechanism used for “bankruptcy” and “failure to pay” events can be applied to “restructuring” events.
Thus CDS Small Bang contract changes specifically address Restructuring in the following ways. First, Determinations
Committees will be able to decide whether or not to hold auctions for specific Maturity Buckets. Maturity Buckets will be
established to limit the number of auctions while still maintaining the optionality for buyers or sellers to trigger and
preserve the spirit of the Restructuring Maturity Limitation Date and Modified Restructuring Maturity Limitation Date
provisions in the ISDA Credit Derivatives Definitions. Second, in order to maintain the concept of a statute of limitations
on credit events as designed in the CDS Big Bang, as well as to prevent investors from “shopping” the auction results, a
“Use It or Lose It” date will be implemented. This stipulates that investors must trigger the trade prior to auction or lose
the Restructuring Event.

European Convention Changes
Quoting Conventions and Coupons

Since June 20th, standard European corporates trade with fixed coupons of 25, 100, 500 and 1000, similar to North
American corporates albeit with additional coupons. Most trades should gravitate to the 100 or 500 coupons with
corporate investment grade credits likely to trade with a 100 strike and high yield credits with a 500 strike. Western
European sovereigns are quoted with a 25 or 100 strike.
The additional coupons allow for greater minimization of the upfront fees that will be exchanged. Two additional coupons,
300 and 750, have been implemented to allow more flexibility in recouponing legacy trades. We have seen these
coupons being quoted in runs as well, the 300 strike significantly more so than the 750 strike.
Restructuring
For clarity, the European corporate contract will continue to trade with Modified Modified Restructuring as the standard
convention.
Full First Coupon

Similar to the SNAC contract, there will be no more short stub or long stub dependent on the trade date. The protection
buyer will pay the seller the full period accrual even if the trade is entered mid-period. The cash settlement amount due
at settlement date includes a rebate payment from the seller for the accumulated accrued coupon.
How Will This Change Existing CDS Positions?
Legacy CDS positions under the existing contract and trading conventions in all likelihood will become relatively illiquid.
Consequently, investors may elect to “roll” into new standardized contracts, work on a bilateral basis with their
counterparties to modify their positions, or utilize a portfolio recouponing service to rebook their existing positions into
new positions reflecting the new coupon strikes (while maintaining the risk profile and payments of their existing net
positions). Adhering to the CDS Small Bang Protocol would allow for the Determinations Committee, cash auction, and
effective date provisions to be applied retroactively to existing positions—this minimizes basis risk between legacy and
new positions. Also this will allow those who did not adhere to the Big Bang protocol another opportunity to adhere their
trades to that protocol as well. Regulators have encouraged the industry to closely consider the CDS Small Bang
Protocol.

Introduction: Why Have a CDS Small Bang?

On March 11, 2009 major European dealers made a commitment to European regulators to begin clearing index and
single name CDS trades through a European central clearing party by July 31, 2009. While the contract and convention
changes are not explicitly required for central clearing of CDS trades (any more than the changes were required under
CDS Big Bang), the changes to promote greater standardization of contracts improves the ability of central clearing
parties to conduct daily hedging operations and reduce systematic counterparty risk. In our CDS Big Bang report we
also discussed the benefits of contract standardization to trade compression and trade processing.
CDS Big Bang, while a dramatic first step for the CDS markets, did not cover everything. The convention changes only
applied to North America. The contract changes did not resolve the complications around restructuring. As restructuring,
which is more prevalent in Europe and raised additional issues, it made sense to implement restructuring related
changes separately from CDS Big Bang.
The Blast Radius of the Bangs The CDS Big Bang brought global
contract and North American convention
changes to market. The global contract
changes included the establishment of
Determinations Committees, 60 and 90
day “look back” periods for credit and
succession events and hardwiring of the
auction mechanism. The convention
changes around fixed coupons, No
Restructuring, full coupon payments and
quoting conventions applied only to
North American CDS.
The CDS Small Bang brings additional

changes for European Corporate and
Western European Sovereign CDS.
Overall, the focus on changes has
occurred in the corporate and sovereign
markets as a simple matter of priority
due to the volume of transactions. The
need to maintain restructuring as a credit
event in Europe required additional
issues, many of them complex, to be
resolved in order to bring greater
standardization to these contracts.
Thus, these changes followed the CDS
Big Bang.
1 2 3 4
Source: Markit
Clearly from the above diagram, there is more standardization to do in other global regions and product areas of credit
derivatives. Neither the CDS Big Bang nor Small Bang applied to U.S. Municipal CDS, Loan CDS, or CDS on ABS. The
industry is actively reviewing the need for modifications to these other products on an ongoing basis.
1
Auction hardwiring was incorporated into Loan Only CDS at the time of the product’s design, well ahead of the implementation dates associated with
CDS Big Bang. Our intention here is just to simplify the progress report.
2
Due to the CDS Big Bang, the restructuring convention standard for North America is now No Restructuring. However, the contract changes here
could be used to handle Restructuring Events for significant legacy positions struck under Modified Restructuring in North America. Asia has typically
traded with Old Restructuring which does not have any maturity limitation restrictions to address but to the extent that there may be significant
positions in Mod Mod R or Mod R in Asia, these contract changes would be applicable.
3
European Corporates and Western European Sovereigns did not change their restructuring convention which continues to be Mod Mod R but the
issue has been addressed explicitly as part of CDS Small Bang.

Since there is interest in central clearing of CDS trades in Asia, one would expect some changes to CDS trading to take
place particularly around trading conventions in the region. Currently being discussed are modifications to Loan Only
CDS in North America moving to a true bullet contract, and changes to emerging markets trades. Lastly, a direct
consequence of the CDS Small Bang changes is the need to address Markit iTraxx and CDX EM index tranches
standardization, which some are already referring to as the “Tiny Bang”.

Expected Global Contract Changes

While removing Restructuring as a standard credit event in North America was straightforward and had broad market
support, the need for restructuring protection in Europe is more complicated and compelling. First, in North America the
Chapter 11 process allows for many restructuring scenarios to be covered under the definition of bankruptcy. Since
Europe does not have a similar Chapter 11 process, protection buyers would not have adequate credit protection if
restructuring were excluded. Second, Basel II capital requirements dictate to banks that CDS positions must include a
restructuring provision in order to qualify fully for capital relief on hedged positions. Positions hedged using CDS without
restructuring protection only provides 40% capital relief, significantly hindering the ability of banks to extend credit.
Maintaining the Modified Modified Restructuring convention for Europe while trying to promote further standardization of
CDS contracts raises some unique challenges. The contract changes for CDS Small Bang addresses these challenges.
The need to maintain the restructuring convention of Mod Mod R

in Europe is clearly illustrated here with 96% of the curves in
Europe trading under the Mod Mod R convention currently.
Note we make the assumption that readers are familiar with the
different types of Restructuring clauses used by the market today
as well as the evolution of the issues over time. For those that
are not or need to refamiliarize themselves with the concepts, the
Appendix provides the various restructuring clause definitions
and reviews the issues in some detail.
Source: Markit
Expanding the Role of the Determinations Committees to Auctions for Restructuring Events
Because of the current difficulties in administering auctions for a Restructuring Event discussed in detail below, the
Determinations Committees rules under the CDS Big Bang do not give the DCs the power to call for an auction if it
pertains to a Restructuring Event. Now that there is a solution that has reached consensus across the industry, following
the implementation of the Small Bang protocol, the rules governing DCs will grant them the necessary authority to
establish an auction to settle Restructuring Events. Specifically, DCs will be able to decide whether or not to hold an
auction for each Maturity Bucket (unless an auction is to be deemed automatic by virtue of the “300/5” Criteria) and
determine the appropriate set of deliverable obligations for each Maturity Bucket. We discuss the details of the handling
of auctions for restructuring events in the next section but at a high level, the role of the Determinations Committees
once a Restructuring Event has been determined through the end of an auction follows these broad steps:
1) Determine the Deliverable Obligations for each Maturity Bucket

2) Determine the transactions that apply to each bucket and lists the Scheduled Termination Dates for each bucket
3) Establish the timeline for triggering transactions (Triggering Deadline)
4) Determine whether to hold auctions for each bucket (Note: some auctions may be automatic due to the “300/5”
rule).
5) If auctions are held, determine the timing of the auctions consistent with how they are currently determined for
bankruptcy and failure to pay events.
Note that for buckets where there is not an auction, parties will have 3 business days following the Triggering Deadline
to exercise the Movement Option. Also while the DCs will generally determine whether or not a Restructuring Credit
Event has occurred, buyers or sellers must still trigger their contracts if they want to fully or partially trigger their trades.

Auctions for Restructuring Events
The CDS Big Bang Protocol hardwired the auction mechanism globally for most types of CDS contracts. As of writing,
there has never been an auction run on a reference entity that covered only a restructuring credit event. In a bankruptcy
or failure to pay credit event, there is only one set of deliverable obligations for each reference entity and tier of debt.
Therefore, only one auction is required to settle most events. This section discusses how this is not the case for most
trades that include restructuring protection.
When a protection buyer triggers settlement for a restructuring, there are restrictions on deliverables under Modified
Modified Restructuring (Mod Mod R) and Modified Restructuring (Mod R). These restrictions mean that running an
auction for a “restructuring” is not as straightforward as one under a “failure to pay” or “bankruptcy” credit event. The
significant restrictions on deliverables are the maturity limitation dates for Mod Mod R and Mod R. These provisions
introduce a different set of deliverable obligations depending on the issuer’s outstanding obligations, whether those
obligations are restructured and the remaining tenor of outstanding trades.
Maturity limitation dates lead to the very real possibility that for the same Reference Entity and seniority, one could see a
different list of Deliverable Obligations for each tenor of outstanding trades—as many as 40 different sets of Deliverable
Obligations (four IMM dates for each of the commonly traded tenors of: 1Y, 2Y, 3Y, 4Y, 5Y, 7Y, 10Y, 15Y, 20Y, and 30Y).
As there are 40 different possible sets of Deliverable Obligations, it follows that there are as many as 40 different
cheapest-to-deliver options, one for each IMM date. While this scenario is unlikely in practice as some buckets are likely
to share the same cheapest-to-deliver option, one cannot know for certain until a restructuring event has already taken
place.
The potentially differing economics among all outstanding trades for a Reference Entity and seniority means that using
one auction price is insufficient. Conversely, holding 40 separate auctions to settle a single Restructuring Event is
operationally unwieldy (even more than 40 if there are multiple tiers of debt—senior and subordinated for instance). As it
would take some time to properly conduct 40 auctions, there is the distinct possibility that market movements could
impact the final pricing of one auction versus another. Investors take positions in credit default swaps because they
have a particular view on credit risk not a view on how market impacting news might affect auction mechanics.
None of this changes the need for the market to maintain the concept of maturity limitation dates going forward in order
to prevent protection sellers from triggering contracts in immaterial restructuring events when the bonds are above par
and protection buyers from delivering longer maturity debt at deep discount; both actions could lead to an unintended
economic windfall (more information regarding Restructuring and its evolution over time is provided in the Appendix). If
the DC determines that there has been a Restructuring Event, it is still up to either the protection buyer or seller to trigger
settlement or not. Sometimes protection buyers elect not to trigger even if their trade is “in the money” as they expect a
bankruptcy or failure to pay event is imminent and likely to generate a greater payoff. Also if the restructuring event is
particularly immaterial, it may not make any sense to trigger in the first place. Thus the market has a need to maintain
the trigger optionality concept as well.
As the auction methodology has worked successfully for over 70 auctions, the inclination for change is minimal. The
proposal is to allow for multiple auctions while constraining the total possible number of auctions. The concept is to
aggregate the different sets of deliverable obligations into a fewer number of auctions than might otherwise be required
but still maintain the spirit of the maturity limitations. The resulting proposal is Maturity Buckets. The Maturity Buckets
are the same for Mod Mod R and Mod R trades with only some slight differences (discussed in more detail below).
Generally, the buckets are as follows:

When a protection buyer triggers protection on a

CDS for a Restructuring Event, maturity
limitation dates apply. By setting aside defined
buckets for the maturity of deliverable
obligations and aggregating them as such,
administering the auctions will be less
cumbersome and clients will have fewer
concerns about significant price movements
substantially impacting the final price on some
deliverable obligations but not others.
Source: ISDA, Markit If a protection sellers triggers, no maturity

limitation dates apply. Effectively, all
transactions are considered to be in the 30 year
bucket.
The maturity of each bucket runs from the Restructuring Date to the IMM Roll
Date occurring on or immediately following the length of time specified (i.e., the
time indicated plus a maximum of 90 additional days--until the next roll date). The Maturity Buckets replace the definitions of
Shorter dated debt can always be delivered into longer dated buckets. Restructuring Maturity Limitation Date (RMLD)
and Modified Restructuring Maturity Limitation
Date (MRMLD). For definitions of RMLD and
MRMLD, see the Appendix.
The buckets are defined for both deliverable obligations and CDS transactions. Before an auction can be held, both
obligations and transactions need to be assigned to their appropriate buckets. The process is different for each.
Matching Deliverables to Maturity Buckets
Provided that the deliverable obligations meet the necessary criteria regarding transferability and multiple holders,
matching the eligible deliverable obligations to the proper Maturity Buckets is straightforward. The obligation becomes a
member of each and every Maturity Bucket where its maturity date is less than the Maturity Bucket Limitation Date.
For Deliverable Obligations, It may be

more helpful to think of the Maturity
Buckets like a cascading series of
troughs, where the contents in the
trough above spills down to the trough
below as shorter maturity obligations
are always deliverable into longer
maturity buckets. Deliverable
Obligations are first placed in the
troughs as you would expect by
comparing the maturity of the bond
versus the “end date” of the trough.
Source: Markit
Matching Transactions to Maturity Buckets and The Rounding Down Convention
A trade falls into a bucket if the maturity of the CDS trade occurs on or prior to the Maturity Bucket End Date and after
the Maturity Bucket End Date of any earlier dated bucket as long as the result complies with the Rounding Down
Convention. An example will make things clearer. If you have a CDS position that has 9 years until maturity, it would fall
into the 10 year bucket if simply looking at the end dates of the 7.5 year and 10 year buckets. However, if the only
potential deliverables have maturities of 9.5 years and 3 years, then the transaction is allocated to the 5 year Maturity
Bucket. The reason for this is to prevent a protection buyer from having the ability to deliver obligations beyond their
Scheduled Termination Date (maturity of the CDS)—a scenario that would violate the maturity limitation dates that are

currently applicable. While in theory a 3 year bond would be eligible as a Deliverable Obligation into the 7.5 year
Maturity Bucket, in this simplified example the 7.5 year Maturity Bucket would effectively be identical to the 5 year
Maturity Bucket. To avoid redundancy, the 5 year Maturity Bucket thus captures every transaction starting at just over
2.5 years (Restructuring Date to the IMM roll date occurring on or immediately following 2.5 years) to just shy of 9.5
years. The Rounding Down Convention naturally does not apply to the first bucket under Mod R or Mod Mod R.
Bonds: a 3 year maturity bond is

deliverable in the 5 year bucket; a 9.5
year maturity bond is deliverable in
the 10 year bucket. There are no
other bonds or loans.
CDS: Based on time alone, we would

expect a 9 year CDS position to
normally be placed in the 10 year
bucket. But as there are no
deliverables with maturities between
5 and 7.5 years, the 5 year and 7.5
year buckets are effectively identical.
Thus, the 9 year CDS trade goes into
the 5 year bucket.
Source: Markit
To Auction or Not to Auction and the “300/5” Criteria
The Determinations Committees will determine whether or not to hold an auction for each Maturity Bucket based upon
DTCC Trade Information Warehouse data of triggered transactions. An auction will automatically be held for a given
Maturity Bucket if 300 or more transactions assigned to the Maturity Bucket are triggered and 5 or more Dealer Members
of the DC are party to those transactions. This is known as the “300/5” criteria. If an auction is not automatically
determined, the DC may elect to do so based upon a vote similar to how they currently conduct votes to decide other
issues.
The impact of this is to prevent conducting an auction on illiquid credits and to avoid conducting redundant auctions
where the list of Deliverable Obligations does not vary across two or more buckets. The DC will also determine the list
of Deliverable Obligations for each Maturity Bucket by assigning them to a specific Maturity Bucket if its final maturity
date is on or prior to the Maturity Bucket End Date. The exception to this rule is the Maturity Bucket for Mod-Mod 5 year.
Here, Restructured bonds or loans with a final maturity date up to 5 years after the Restructuring Date will be deliverable
to settle transactions with a Scheduled Termination Date occurring 2.5 years or less after the Restructuring Date. It is
important to remember that shorter dated debt can always be delivered into longer dated buckets as these would be in
the relevant Deliverable Obligations list for that Maturity Bucket by definition.
Movement Option
If no auction is held for a specific Maturity Bucket, the transactions in that bucket are subject to a Movement Option.
Both the protection buyer and seller have this option. The protection buyer can move the trade assigned to that Maturity
Bucket to the next earliest Maturity Bucket End Date for which an Auction is being held. The protection seller can move
the trade to the 30 year Maturity Bucket if there is an Auction for it. If both parties exercise the option, the exercise of the
protection buyer is given priority. The option must be exercised with 3 business days of the Exercise Deadline. If the
option is not exercised, the trade will settle using the Fallback Settlement Method subject to the Maturity Bucket
limitations on what is deliverable if the protection buyer originally triggered. If the protection seller originally triggered,
the Maturity Bucket limitations do not apply.
The intent of the Movement Option is to make sure that parties still have the ability to settle (cash or physical) via the
auction even if an auction for a specific bucket is cancelled.

We extend the previous

example and include additional
bonds in the 15Y, 20Y, and 30Y
buckets to make things more
interesting. If the DC decides
not to hold an auction for the
20Y bucket, the Movement
Option would become available.
The trade could go to the 15Y
bucket if the Protection Buyer
exercises or the 30Y bucket if
the Protection Seller exercises.
If neither exercised, the trade
would settle following the
Fallback Settlement Method.
Source: Markit
Comparing Mod Mod R and Mod R
The proposals for conducting auctions for Mod R trades are similar to the discussions above regarding Mod Mod R
trades although there are some differences. For Mod R, the first auction bucket has a Maturity Bucket End Date that
occurs on the IMM date on or immediately following 2.5 years after the Restructuring Date. For Mod Mod R, the first
bucket had a Maturity Bucket End Date of up to 2.5 years for other obligations and 5 years for Restructured obligations.
Mod R also features a “pre-2.5 year” bucket that will have a Maturity Bucket End Date of the latest final maturity date of
any Restructured bond or loan that falls prior to 2.5 years after the Restructuring Date. These features help maintain the
concepts currently imbedded in the definition of Restructuring Maturity Limitation Date and Modified Restructuring
Maturity Limitation Date.
The current definitions for Mod Mod R and Mod R stipulate certain limitations on deliverable obligations not only
regarding maturity but also regarding transferability of those obligations. For Mod Mod R, deliverable obligations can be
conditionally transferable. For Mod R, they must be fully transferable. These differences regarding the transferability of
obligations are maintained even with the changes brought forth by the CDS Small Bang. For the 30 year Maturity
Bucket under Mod Mod R or Mod R, the transferability limitations do not apply regardless of whether an auction is held
for that bucket or not (recall that the buckets are still applicable for determining the relevant deliverable obligations for
CDS trades even though a specific bucket may or may not have an auction).
Any CDS transactions triggered by a protection buyer and assigned to the 30 year buckets will be subject to the Fallback
Settlement Method and not an auction unless the transaction arrived to the bucket via the Movement Option. An auction
can still apply for transactions assigned to the 30 year buckets if triggered by a protection seller. The reason is to avoid
two sets of deliverables for the bucket (one subject to a maturity limitation and the other not subject to a maturity
limitation).
Old R Auctions
For trades conducted under Old R, the Maturity Buckets will not apply. Recall that under Old R, no maturity limitation
restrictions apply currently. By not applying the Maturity Buckets under the new contract changes to Old R trades, there
is effectively no difference from the current provisions.
“Use It or Lose It”
There are occasions when protection buyers opt not to trigger their trade for settlement even though the cash debt is
trading significantly below par in response to a Restructuring Event. They may want to trigger on a subsequent credit
event where their trade would have a higher pay-out. The “Use It or Lose It” feature limits the amount of time that parties

have to trigger on any part of the overall notional amount that is not triggered following a Restructuring Event. In this
way it is similar to the rolling effective date concept from CDS Big Bang in that there is a “statute of limitations” on the
event. The Triggering Deadline is 5 business days following the publication of the final list of the deliverable obligations.

European CDS Convention Changes

The convention changes for European Corporate and Western European Sovereign CDS took effect on June 20th, 2009.
The changes are very similar to the North American convention changes associated with the CDS Big Bang. The most
significant difference is that the Europe retains the Modified Modified Restructuring convention which serves as the focus
of the contract changes addressed in the previous section. Another difference is the multitude of coupon strikes being
used in Europe relative to North America, other than that the convention change around fixed coupons is a concept that
will be very familiar to readers that are aware of CDS Big Bang. The rest of the convention changes are identical to
those in CDS Big Bang.
Fixed Coupons
The concept of fixed coupons is not new and has been employed in the trading of CDS indices for some time now.
Distressed trades typically settled in points upfront with 500 basis points fixed coupons. The CDS Big Bang brought
fixed coupon trading to single names more fully by extending the practice to investment grade credits in North America.
Readers who are unfamiliar with the concept of fixed coupons should read our previous report “Understanding the CDS
Big Bang: Global Contract Changes and North American Convention Changes” found at www.markit.com/cds.
The North American conventions featured two fixed coupon strikes: 100 and 500 basis points. For Europe, consensus
settled on multi-step couponing and the following strikes are expected to be standard: 25, 100, 500, and 1000 basis
points. The main reason for the additional strikes is the idea that people have a preference to enter into trades near par.
By providing a broader possible range of strikes, there is a greater chance that new positions can be initiated closer to
par similar to the par spread convention today (in fact, this is why they are called par spreads). The trade-off is that
more strikes leads to less standardization. Another reason for having strikes in addition to 100 and 500 basis points has
to do with the potential recouponing of legacy trades containing restructuring, which we discuss in greater detail later in
this report. As part of CDS Small Bang, there are two additional strikes of 300 and 750 basis points that were
implemented primarily to assist in recouponing legacy trades although some dealers were thought to have an interest in
making markets in these strikes as well.
Trading with a Full Coupon
Prior to CDS Big Bang, whether a protection buyer paid a coupon on the first coupon or IMM date for a North American
CDS trade depended on when the trade occurred. IMM dates are the chosen termination dates for CDS contracts:
March 20th, June 20th, September 20th, and December 20th for any given year.
If the trade date fell before 30 days prior to the first coupon date, the accrual was due on the first coupon date for the
number of days of effective protection during the period. This was known as a “short stub” period. If the trade date was
within 30 days before the first coupon date, there was a “long stub period”. No accrual of premium would be paid on this
first IMM coupon date, rather the long stub would be paid on the following coupon date. That payment would include the
portion of premium owed for protection in the first period plus the full premium for the second period. Clearly this is
suboptimal from the point of view of contract standardization. Starting on June 20th, 2009, Europe adopted the full
coupon convention similarly to the way the convention works for North America as a result of CDS Big Bang. For a more
detailed treatment of the full coupon convention, readers are encouraged to read our previous report “Understanding the
CDS Big Bang: Global Contract Changes and North American Convention Changes”.
Restructuring Clause Convention
For clarity, the restructuring clause convention will continue to be Modified Modified Restructuring for European
Corporates. While maintaining this convention is not a change from current market practice, doing so in alignment with
seeking to achieve the goals of central clearing, greater operational efficiency, and reduced systemic risk has significant
implications for the contract changes enumerated above.

Quoting Conventions
In North America, the predominant quoting conventions are to quote 100 strikes in quoted spreads and 500 strikes in
points upfront with the idea that only the more distressed credits, would see the 500 strike + points upfront convention.
This followed closely the conventions from before CDS Big Bang where most names were quoted in par spreads and the
more distressed credits in points upfront with a 500 basis point fixed strike.
The quoting conventions for CDS Small Bang saw their first day of trading on June 22, 2009. While there are no
constraints on how dealers make quotes, the expectation was that the 100 and 500 strikes would predominate with
investment grade names being quoted at the 100 strike and high yield names being quoted at the 500 strike. For
particularly tight or wide credits, the 25 and 1000 strikes would be used, respectively. Western European Sovereign
trades were expected to be quoted at the 25 or 100 strikes. While some dealers may also quote markets using the 300
and 750 strikes, the expectation was that these would not be as liquid as the standard strikes and would be primarily
used for recouponing legacy positions.
There were a few arguments put forth by those advocating multi-step couponing in Europe. First, customers were
accustomed to seeing credits trade in par spreads. Second, customers would be cautious about doing trades that
required a large upfront payment. Thus they argued that multi-step coupons were required rather than the 100/500
convention embraced in North America, even if this meant sacrificing the additional standardization of contracts through
limiting the number of strikes.
New Runs
Markit has made several observations about the dealer runs we have seen thus far. First, some dealers are trying to
stay within a 100/500 paradigm similar to the way credits trade in North America. Other dealers are quoting a broad
range of coupon strikes. In comparing what we have seen to the conventional wisdom prior to launch of the quoting
conventions, these observations are significantly different from expectations:
1) We are seeing many names quoted in multiple strikes, one dealer even states in their runs that they will quote
the full range of coupons for each name to any client that requests it. As the levels are quoted in conventional
spreads, the quotation varies only slightly from one strike to another.
2) We are seeing a lot of names quoted using the 300 strike but not a lot quoted at the 750 strike.
3) We see a lot of 500 strikes not being quoted in points upfront like the standard North American convention but
rather in quoted spreads, even where it results in a quoted spread of over 1000.
4) We see only the tightest sovereigns being quoted with a 25 strike; most are quoted at a 100 strike.
5) For names with senior and subordinated trading, we often see both tiers quoted in multiple strikes with a step-
up approach (e.g., senior quoted in 100 and 300 strikes, subordinated quoted in 300 and 500 strikes).
In this run, the dealer indicates which fixed strike applies by using asterisks
and a legend to explain their quotes. Because of the multiple strikes in
Europe, dealers will be providing an explicit indication of these to avoid any
potential confusion.
Here we see examples of 300, 500, 750, and 1000 strikes being quoted, all
as quoted spreads. The two columns of quotations here are indicative of
senior and subordinated levels.
Source: Markit

In this run of Western European sovereigns, we see the 25 strike on the tighter
credits and the 100 strike being used for the other credits. As these are all
high grade credits (sovereigns), we should not be surprised to see everything
quoted as spreads.
Source: Markit
The financials feature a lot of credits that trade with senior and
subordinated tiers. All the entity-tier combinations in this run are
quoted in two strike conventions.
The subordinated is often quoted with the coupon strikes a

“notch” higher. For example, ABBEY senior is quoted at 25 and
100 strikes, while the subordinated is quoted at 100 and 300
strikes. In other cases the senior and subordinated are quoted
using the same set of strikes, for example, Lloyd’s. Whether or
not the strikes notch higher or not is entirely dependent on where
the spread levels are for senior and subordinated with the rule
being that the strikes that are utilized seek to minimize the upfront
payment.
Source: Markit
It is too early to make any generalizations about volume accumulating in some strikes or another. The conclusions we
can draw from these observations is that the market (dealers and customers alike) is trying to adjust to the new
conventions and determine what will work best. Many dealers are sensitive to customer concerns regarding large
upfront payments and wanting to make sure that customers still see names quoted in spreads as much as possible to
match the historical context they have from when names were quoted in par spreads.
Markit CDS Converter and ISDA CDS Standard Model
The single largest cause of trade breaks with Markit CDS indices is a disagreement surrounding the upfront payment
due to one counterparty from another. As the trading convention for North American CDS changed to a fixed coupon
with an upfront payment in CDS Big Bang, it was critical that trades would not break due to disagreements on the upfront
payment due. This was a particular concern for entities that trade with a 100 basis points fixed coupon as dealer runs
for those credits would display a conventional spread and not the upfront payment.
At the urging of CDS participants, Markit created the Markit CDS Converter. The Markit CDS Converter was designed
with the input of key CDS dealers and utilizes the ISDA CDS Standard Model code as well as the standardized inputs for
the code. The converter allows for easy translation between the conventional spread found in dealer runs for investment
grade reference entities to the required upfront payment.

With European contracts moving to fixed coupons and the preference of that market to see credits on a conventional
spread basis, the Markit CDS Converter is even more important in making sure those single names trade smoothly.
Several changes were made to the Markit CDS Converter so that it can serve the same function for European trades. In
order to incorporate the numerous strikes for the European convention changes, Markit simply made the coupon field
free form so that a user can enter any coupon when converting from conventional spreads to points upfront or vice versa.
Additional currency choices were made available as well to reflect the multitude of currencies that are standard in
European CDS.
The Markit Converter can be found at www.markit.com/cds. It is made freely available to investors. The Converter is an
implementation of the ISDA Standard Model which is maintained by Markit. More information about the model, including
any updates, can be found at www.cdsmodel.com.
Changes to Markit CDS Converter The following changes were made to the Markit CDS Converter in
order to accommodate the changes in European CDS
conventions:
1. The Standard Coupon field was changed from a

dropdown selection of just 100 and 500 bps to be a free-
form text field to incorporate the greater number of
strikes (additionally 25, 1000 and also possibly 300 and
750).
2. Additional currency choices were added.
3. The interest rate curves used in the Converter

calculations vary with the selection of currency (not
explicitly illustrated in the diagram to the left).
Other changes include functionality that allows users to email the

results and a full breakdown of accruals.
Source: Markit
1.

Treatment of Markit iTraxx and CDX EM Index Trades

Indices
Markit iTraxx indices trade with Modified-Modified Restructuring except for the Sub-Financials which trade with
Restructuring. The Emerging Markets indices of CDX trade with Old Restructuring. The other Markit CDX indices trade
with No Restructuring by convention. Because optionality needs to be maintained on single name trades for parties to
trigger settlement or not, a potential complication arose with the handling of index trades where one of the constituents
undergoes a Restructuring event. The potential of having multiple versions of the index, one where the Reference Entity
was triggered and another where it was not becomes extremely problematic when there are multiple Restructuring
events in the same series of an index.
The Proliferation of Index Versions Over Multiple Restructuring Events? The option for parties to trigger
settlement on a Restructuring Event or
not resembles a binomial tree. Without
a solution, the number of index versions
would grow geometrically as this
example shows.
Here we illustrate the growth through

just three Restructuring Events. The
example assumes a new index at
Series 1 (S1) with new version numbers
(e.g., V3.1, V3.2, etc.) reflecting the
decision to either fully trigger or not
Source: Markit trigger at all on each Reference Entity.
While historically restructuring events are rare compared to their credit event
cousins, failure to pay and bankruptcy, it is not inconceivable to have a few
successive restructuring events leading to a proliferation of index versions.
Consequently this would lead to less standardization of contracts across outstanding
positions unless a solution is put in place. The table to the right quantifies the above
diagram through ten successive restructuring events on constituents of the same
index. The final result in that scenario would be 2,037 separate versions for that
index series. It only takes a little imagination to envision the operational burden that
such a scenario would imply.
As bad as this might sound now consider that the typical lot size on an index trade is
for 10 million notional and that you can partially trigger in minimal increments of 1
million. So you have 10 sets of combination pairs (0 triggered, 10 not triggered; 1
triggered, 9 not triggered; 2,8; etc.) This means a different version for each scenario
reflecting different factoring for each restructured constituent. The number of
possibilities now turns into a factorial tree where the rightmost leaf is always the
original version of the index. Without drawing the tree which would be cumbersome Source: Markit
to do here, you get 3,628,790 (10! – 10 duplicates of S1V1) different versions. That
is just for a typical lot size; now consider all the possible notional amounts that are
outstanding….feel free to calculate this for yourself if you have this information and
the inclination, we have neither. It is completely an academic exercise at this point
anyhow.
Recall that one of the key motivations behind the contract and conventions changes for single name CDS is the desire
for greater standardization in order to reduce systemic risk and operational burdens. Doing this however should not
come at the expense of making credit indices less standardized. The solution involves breaking the index trade into two
separate pieces following each restructuring event: a single reference entity piece where parties can elect to trigger or
not and an index piece which contains only those constituents not impacted by a Restructuring Event.

Index Trades for Multiple Restructuring Events The solution is to split off the impacted Reference Entity to single
name trades (e.g., RE1) with the trigger optionality and the
subsequent version of the index is simply “factored down” or has
the impacted reference entity effectively removed (e.g., S1V2).
This is how indices are treated for other credit events.
This approach maintains the requirement for the optionality in

triggering trades in a Restructuring Event and maintains
fungibility of contracts in two ways. Index trades remain fungible
by only having one on-the-run version following an event and the
newly spun-off single name trade will be fungible with other single
name trades on that Reference Entity provided that the tenor and
Source: Markit strike are similar with other outstanding single name trades. This
solution also makes the triggering of partial notional amounts
easier to resolve.

Tranches
The solution for allowing trigger optionality on an index trade while still maintaining the standardization of the index
trades is elegant. In effect, the piece where an investor may want to exercise some discretion in triggering (no amount
or partial amount) can be separated from the new version of the index. There is not a way to isolate a Restructured
Reference Entity from a tranche trade, however. Tranche trades reference an index and as long as the decision is to
fully trigger for settlement, the index reference matches the new version of the index and all tranche trades on the
relevant index and maturity are fungible with one another. If it is partially triggered, the resulting reference index for the
tranche trade does not match the newly versioned index nor will tranche trades themselves match each other. The
variance across trades depend on two factors: 1) the varying notional amounts across the trades and 2) the degree to
which investors elect to partially trigger (or not trigger at all).
By necessity then, if the notional amount for the Restructured Reference Entity is only partially triggered, the tranche
trades will become bespoke transactions. As this solution is not entirely desirable, the industry continues to work toward
a better solution—one that does not require the tranche to become a bespoke portfolio transaction. As the industry does
not wish to delay central clearing of index and single name trades in Europe, resolving this issue has been tabled for
now. Some have started referring to the eventual resolution of this issue for tranches as “Tiny Bang”.
Here we illustrate the difference between Trigger Optionality: The Challenge for Tranches
tranche trades across the set of attachment and
detachment points for Markit iTraxx Europe
following a Restructuring Event for two
scenarios—notional fully triggered and notional
only partially triggered.
In this example, we assume a 10 million

notional trade at each attachment/detachment
point with a recovery of 40%.
The first table illustrates what happens if the

trades are fully triggered. The resulting
attachment/detachment points reference the
new “on the run” index. The second table
shows the results assuming that only 1 million
notional is triggered across each set of points.
The resulting set of trades would reference an
index that had a weighting of 0.72% for the
Restructured Reference Entity and 0.8% for the
other constituents—which would not match any
index version. The formula for determining new
points is: (Original Attachment Point – Losses to Source: Markit
Date)/Index Factor.
This simple example illustrates the difference in the two scenarios and the resulting lack of standardization across these two sets of
trades (each attachment/detachment pair is a separate trade). Considering that investors are not restricted to doing only 10 million
notional trades or limited to the extent to which they can trigger (other than doing so in 1 million notional increments), the number of
variations can grow dramatically. The number of variations even within a single Restructuring Event depend on the number of
outstanding trades at each attachment/detachment point, the notional size of outstanding trades, and the degree to which notional
amounts are triggered (full, partial, or none). Lastly, the number of variations would grow geometrically over multiple Restructuring
Events.

Migration of Old Contracts to New Contracts/Conventions

Global Contract Changes
Small Bang Protocol
This protocol will allow investors the opportunity to apply legacy trades to the various new auction provisions regarding
Maturity Buckets and “Use It or Lose It”. Also for those investors that did not adhere to the Big Bang Protocol or who
worked out bilateral arrangements with their counterparties to have certain trades exempted from the Big Bang Protocol,
the Small Bang Protocol offers them another chance to adhere fully to the Big Bang Protocol. The two are linked as the
contract changes in Small Bang rely heavily upon a lot of the work done in the Big Bang Protocol. The Small Bang
Protocol is expected to be open for adherence from July 14th to July 25th with a “go live” date the following week.
2009 Restructuring Supplement to the 2003 ISDA Credit Derivatives Definitions
This change will formally eliminate the Modified Restructuring Maturity Limitation Date and Restructuring Maturity
Limitation Date in place of Maturity Buckets. It will also define the Maturity Buckets themselves, other terms, and modify
existing ones as necessary so that these proposals will work for old and new contracts.
DC Committee Rules
The rules will be modified to allow Determinations Committees to determine whether auctions will be held or not for
Restructuring Events. The current rules expressly prohibit the DCs from establishing an auction for an entity under a
Restructuring Event. It also will specify the role of the Determinations Committees in defining the eligible deliverable
obligations for the different buckets.
European Convention Changes
The convention changes for CDS Small Bang did not require any document changes. The changes regarding fixed
coupons, full payment of first coupons, and quoting conventions all took effect on June 20th, 2009 (June 22nd was the first
trading day) and were applicable to new trades going forward. In our report on the CDS Big Bang, we discussed the
desire for some investors to recoupon their old trades to the new strikes in order to avoid any potential liquidity risk when
they go to exit the position. However, the trigger optionality in restructuring adds an extra complication.
Portfolio Recouponing
Recall from the CDS Big Bang that the idea behind recouponing is to rebook your existing trade that was done at a par
spread, into new trades using the fixed coupons of 100 and 500 basis points. The new trades were subject to the
condition that you replicated the same risk profile from your original trade. Stated another way, you should not have to
change the economics of your existing position such that you would profit or lose from this adjustment. This is relatively
easy to do where there are only two strikes and the trades are done as No Restructuring. Recall the recouponing
example we used in our Big Bang Report:

Assume an investor bought protection with a $100 million notional legacy

position and a coupon at 50 basis points requiring an annual premium of
$500,000 per year. In order to yield the same cash flows using the
standard combination of the 100 and 500 fixed coupons, the resulting
position would be $112.5 million notional long at 100 basis points fixed
and $12.5 million notional short at 500 fixed. This is fine as long as the
trade is done as No R (or Old R even). However if done, under Mod R or
Mod Mod R, the resulting positions—one leg long protection and one leg
short protection results in an asymmetric risk profile.
Source: Barclays Capital
Now, reconsider this exact same example and merely change the trade details to reflect that the trade was done under
Modified Modified Restructuring instead of No Restructuring. The resulting position of protection seller on $12.5 million
and protection buyer on $112.5 million is problematic.
Why? The investor in this scenario has a long and short position with different rights regarding deliverable obligations if
he triggers both trades. The protection buyer has a limitation on what deliverable obligations can be delivered; whereas
the protection seller does not. Because the recovery can vary due to the different sets of deliverable obligations, the
new risk profiles are not the same. If you knew the difference in recoveries ahead of time with certainty, you adjust the
notional positions to account for this fact and reflect the same risk profile as your legacy position.
As you do not know the ultimate difference in recoveries at the time of triggering your trades, another approach is
required. This asymmetry in risk profiles can be avoided by ensuring that the resulting trades from recouponing both go
in the same direction. In other words, if you are a protection buyer on both legs or a protection seller on both legs, your
rights are the same. As long as the original par spread falls between the two fixed strikes, your trades will face the same
direction. To better ensure this, you can utilize one of the really wide strikes such that the original par spread almost
always falls between the two strikes such as the 25 and 100 basis points strikes in the new conventions. One possible
solution would look like this:
By utilizing one of the “wide strikes” (25 or 1000 bps) in combination with
one of the other convention strikes, we can better ensure that the original
spread falls between the two strikes as opposed to outside of them.
Doing this results in two legs that are long protection in this example.
Since the resulting legs are both in the same direction, you avoid the
asymmetric risk profile stemming from the different rights belonging to the
protection buyer and seller in Mod Mod R or Mod R trades.
Source: Markit

Conclusion
The contract and convention changes contained in CDS Small Bang are important in furthering the standardization of
CDS contracts accomplished in CDS Big Bang. These changes also for the first time solve the challenges posed by
trying to resolve restructuring events through the auction process. None of these changes are explicitly required for
CDS contracts to centrally clear per se, but regulators and industry participants are keenly aware that the
standardization of contracts greatly enhances the effective of central clearinghouses to manage the impact of any
significant clearing members should they default on their commitments.
As we argued in our prior report on CDS Big Bang, contract standardization also greatly reduces operational risks
particularly around processing of payments and trades related to CDS. With the goal of achieving T+0 trade processing
and clearing the backlog of derivatives trades, the value of these changes should not be underestimated. Considering
the success and participation rate in adherence to the CDS Big Bang Protocol, we expect the vast majority of accounts
to adopt the CDS Small Bang Protocol. Electing not to do so invites basis risk between old and new trades. It also
could lead to potential liquidity issues when investors go to unwind or net out of existing positions. Considering the
industry’s proud tradition of product innovations and improvements combined with increasing regulatory interest in this
space, we fully expect additional changes to credit derivatives to be forthcoming this year.

Appendix: History and Definitions of Restructuring

There are four distinct types of restructuring clauses for CDS contracts:
Old Restructuring (Old R): Here you are protected from restructuring as well as the standard bankruptcy and failure to
pay. This clause has the least limitations in terms of the bonds you can deliver (maximum maturity up to 30 years
beyond restructuring date and loans can be delivered here as long as the seller can legally hold them). This is the
market standard for entities outside of Europe and North America.
Modified Modified Restructuring (Mod Mod R): Here you are also protected from restructuring, but are more restricted
on what you can deliver - if you deliver debt that was restructured it has to have a maturity of less than 60 months
beyond restructuring date. This is the market standard for Europe.
Modified Restructuring (Mod R): This limits you to only deliver bonds or debt that is fully transferable (ruling out most
loans), and also to deliver debt that has maturity less than 30 months beyond restructuring date, or even earlier if the
maximum maturity of any debt that was restructured is less than this. This was the market standard for North American
high grade entities prior to CDS Big Bang.
No Restructuring (No R): Here you are only protected from failure to pay, bankruptcy or moratorium on an entities debt.
Restructurings do not trigger a credit event. This was the market standard for high yield North American entities prior to
CDS Big Bang. With the launch of CDS Big Bang this is now the convention for all North American entities.
The different definitions of restructuring came about gradually over time in response to market needs. The table below
shows a timeline of when the various restructuring definitions came into being. We discuss the events that prompted
their creation next.
History of Restructuring
Source: Markit
.
The 2003 ISDA Credit Definitions has five primary criteria (first specified in the 1999 ISDA Credit Derivatives Definitions)
for determining whether a Restructuring has occurred: 1) reduction in the amount of principal at maturity or redemption
dates, 2) reduction in the rate or amount of interest payable or in the overall number of interest payment periods, 3) any
change in the seniority or ranking of payments of any obligation, causing the subordination to any other obligation, 4)
postponement or deferral of a date for payment of interest, accrual, or principal, or 5) any change in the currency or
composition of payment of interest or principal to any currency which is not a Permitted Currency. However, these
criteria can only qualify as a Restructuring as long they are a direct or indirect result of deterioration in the
creditworthiness or financial condition of the Reference Entity.

This last condition is somewhat vague due to the range of restructuring events themselves. There are “hard” and “soft”
restructuring events (material and less material events). The “harder” the restructuring event, the more they resemble
bankruptcy or failure to pay events in terms of the price impact on the issuer’s bonds and/ or loans. For example, a
restructuring could happen which is not material in that there is no real loss for the protection buyer of a CDS (e.g. the
maturity of a bond gets pushed out slightly, or the coupon on a bond gets amended) and the issuer of the bonds is not
actually in trouble—principal and interest repayments are not in default, and in all likelihood going to be repaid as
expected. Depending on the price the bonds are trading at in the market, and the spread at which the trade in question
was struck at relative to where the market is now, the protection seller may find themselves in the position where they
financially gain from triggering the contract.
Restructurings vary significantly from one credit to the next. The

soft end features a change of currency in which the debt can be
repaid. This usually has little economic impact to lenders absent
extreme circumstances. The hard end features reduced principal
and interest which resembles failure to pay or bankruptcy events far
more closely in terms of pricing impact on the issuer’s debt.
Source: Markit
In the Conseco, Inc. restructuring, there was a maturity extension on short term bank loans that triggered a Restructuring
Event. At the time, longer dated bonds were trading at a deep discount relative to the bank loans. Protection buyers
triggered their trades and delivered the distressed bonds in what many argued was a particularly soft restructuring.
So how material does a restructuring have to be to constitute a Restructuring Event? While it is possible to specify a
legal definition for what technically constitutes a restructuring, it is more difficult to specify a definition for a material
restructuring and prevent the scenario above. While it is difficult to write a legal definition of a material restructuring,
market participants would likely agree on what constitutes a material restructuring when they saw one (and if they were
not arguing in favor of their market positions). Rather than pursue a perfect definition of a material restructuring which
may be an elusive goal, market participants decided that the best approach was to define rules on which obligations
would be deliverable depending on whether a protection buyer or seller triggered.
After a restructuring, it is likely the bonds are not in default, and generally longer dated bonds are trading cheaper than
the shorter dated obligations. Hence, there is a maturity limitation to stop protection buyers delivering obligations trading
cheaper than the restructured bonds, when the adverse impact was on the restructured bonds.
If the seller triggers instead of the buyer, it is likely that the seller has an incentive to do so. Lifting the maturity limitation
limits the 'unintended gain' (or eliminates any gain at all) for the protection seller. Three years ago, interest rates were
very low and so were credit spreads. Bonds were all generally trading above par. If an immaterial restructuring
happened, the seller could have triggered, forcing the protection buyer to deliver bonds trading above par but receiving
only par for them. Thus the protection buyer is not limited in what can be delivered if the protection seller triggers.
These scenarios along with the Conseco, Inc. restructuring served as catalysts for the creation of the Modified
Restructuring definition. Concerns in Europe that the Modified Restructuring provisions were too limiting led to the
development of Modified Modified Restructuring (in Europe, corporate bonds tend to have long maturities).
Restrictions on Deliverable Obligations for Restructuring Events The four types of

restructuring clauses
have varying restrictions
on deliverable
obligations regarding
maximum maturity and
conditions on
transferability.
Source: Markit

The Restructuring Maturity Limitation Date

(RMLD) applies to CDS trades with Modified
Restructuring and is designed to limit the
obligations that are deliverable in a Restructuring
Event).
On a first pass, this is the earlier of 30 months

(first dashed line) following the Restructuring
Date and the latest final maturity date of any
Restructured Bond or Loan. But it cannot be
earlier than the maturity of the CDS (solid line) or
later than the maturity of the CDS plus 30
months (second dashed line). Obligations with
maturities falling within the orange area are
definitely deliverable. The blue area indicates
the dependence on the latest final maturity date
of any Restructured Bond or Loan as setting the
limitation date and thus the range of maturities
on deliverables. RMLD only applies if the .
protection buyer triggers settlement. Source: Markit
The Modified Restructuring Maturity

Limitation Date (MRMLD) applies to
CDS trades with Modified Modified
Restructuring and is designed to limit the
obligations that are deliverable in a
Restructuring Event (but not as limited
as they are under Modified Restructuring
from the Restructuring Maturity
Limitation Date).
At a minimum, regardless of the amount

of time left before the CDS matures,
Restructured Obligations that mature 60
months or less from the Restructuring
Date are deliverable and other
deliverable obligations that mature 30
months or less from the Restructuring
Date are deliverable. Following from
that, the eligibility of deliverables is a
function of the maturity date on the CDS.
So if the trade has 3 years left before
Source: Markit maturity, Restructured Obligations up to
60 months from Restructuring Date and
Non-Restructured Obligations up to 36
months are deliverable. MRMLD only
applies if the protection buyer triggers
settlement.
While the maturity limitation date restrictions addressed the concerns of unintended settlement results in Restructuring
Events, the resulting cheapest-to-deliver option for each tenor of outstanding CDS trades created a challenge for a
uniform cash settlement mechanism that could be applied in a standard and consistent approach across market
participants. This is the situation from which CDS Small Bang begins.

Contact
For further information, please contact:
Tom Price
Managing Director
Email: tom.price@markit.com
Otis Casey
Vice President
Email: otis.casey@markit.com
Or please visit www.markit.com/cds

Important Messages
Opinions, estimates and projections in this report constitute the current judgment of the author(s) at the time of
writing. They do not necessarily reflect the opinions of Markit Group. Markit Group has no obligation to update, modify
or amend this report or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion,
projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate.
Although reasonable effort has been made to ensure the accuracy of the information contained in this report, Markit
Group makes no warranty, expressed or implied, as to its accuracy, completeness or timeliness, or as to the results to
be obtained by recipients, and shall not in any way be liable to any recipient for any inaccuracies, errors or omissions
herein.
Without limiting the foregoing, Markit Group shall have no liability whatsoever to a recipient of this report, whether in
contract (including under an indemnity), in tort (including negligence), under a warranty, under statute or otherwise, in
respect of any loss or damage suffered by such recipient as a result of or in connection with any opinions,
recommendations, forecasts, judgments, or any other conclusions, or any course of action determined, by it or any third
party, whether or not based on the content, information or materials contained herein.
Copyright © 2009, Markit Group Limited. All rights reserved. Any unauthorised use, disclosure, reproduction or
dissemination, in full or in part, in any media or by any means, without the prior written permission of Markit Group
Limited is strictly prohibited.
Markit™ and Markit iTraxx™ are trade marks of Markit Group Limited. Other brands or product names are trade marks
or registered trade marks of Markit or their respective holders and should be treated as such.

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CDS Small Bang:

Understanding the Global

July 20th, 2009

Copyright © 2009, Markit Group Limited. All rights reserved. www.markit.com 2

Why is the CDS Market Changing?

Global Contract Changes

Copyright © 2009, Markit Group Limited. All rights reserved. www.markit.com 3

European Convention Changes

Quoting Conventions and Coupons

Full First Coupon

How Will This Change Existing CDS Positions?

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Introduction: Why Have a CDS Small Bang?

The CDS Small Bang brings additional

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Copyright © 2009, Markit Group Limited. All rights reserved. www.markit.com 6

Expected Global Contract Changes

The need to maintain the restructuring convention of Mod Mod R

1) Determine the Deliverable Obligations for each Maturity Bucket

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Auctions for Restructuring Events

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When a protection buyer triggers protection on a

Source: ISDA, Markit If a protection sellers triggers, no maturity

Matching Deliverables to Maturity Buckets

For Deliverable Obligations, It may be

Matching Transactions to Maturity Buckets and The Rounding Down Convention

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Bonds: a 3 year maturity bond is

CDS: Based on time alone, we would

To Auction or Not to Auction and the “300/5” Criteria

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We extend the previous

Comparing Mod Mod R and Mod R

“Use It or Lose It”

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European CDS Convention Changes

Trading with a Full Coupon

Restructuring Clause Convention

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The subordinated is often quoted with the coupon strikes a

Markit CDS Converter and ISDA CDS Standard Model

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1. The Standard Coupon field was changed from a

2. Additional currency choices were added.

3. The interest rate curves used in the Converter

Other changes include functionality that allows users to email the

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Treatment of Markit iTraxx and CDX EM Index Trades

Here we illustrate the growth through

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This approach maintains the requirement for the optionality in

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In this example, we assume a 10 million

The first table illustrates what happens if the

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Migration of Old Contracts to New Contracts/Conventions

2009 Restructuring Supplement to the 2003 ISDA Credit Derivatives Definitions

European Convention Changes

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Assume an investor bought protection with a $100 million notional legacy

Source: Barclays Capital