Devising a Credit Event Strategy for CDSs - International Law Office

Closing down one credit default swap (CDS) following a credit event may be relatively straightforward, but closing down many CDS transactions at once is more problematic; if they are not handled efficiently, losses may occur. The bankruptcy credit event is the most likely credit event to be triggered under the 2003 Credit Derivatives Definitions.

It is advisable to implement a credit event strategy to minimize loss when dealing with a major credit event, such as the bankruptcy of a major financial institution. Such a strategy should involve: (i) documentation that will help employees to target rapidly the vital information required to effect the credit event process and settlement process; and (ii) personnel who work in committees supervising such documentation ensuring that all parties have all the necessary information to deal with a major credit event at short notice.

The credit event process involves a minefield of administrative tasks. Some, such as the delivery of notices, may seem simple, but they must be managed and carried out coherently. This can be facilitated by compiling a universal spreadsheet with key information, such as:

• the parties' identity;
• the transaction type;
• the settlement method;
• possible credit events;
• notification details and forms; and
• valuation provisions.

Implementing such systems will make it easier to invoke a robust credit event strategy should the time come to face a major credit event.

For further information on this topic please contact Edmunc Parker at Mayer Brown International LLP by telephone (+44 20 7248 4282) or by fax (+44 20 7248 2009) or by email (eparker@mayerbrown.com).