An Introduction to the 2014 ISDA Credit Derivatives Definitions David Benton, Partner – ICM Tony Drake-Brockman, Partner – ICM 10 June 2014 © Allen & Overy 2014 2014 Seminar schedule Tuesday 10 June An Introduction to the 2014 ISDA Credit Derivatives Definitions 8.30am-9.30am Bishops Square David Benton, Partner – ICM, Tony Drake-Brockman, Partner – ICM Thursday 12 June MiFID II – an update on key developments 8.30am-9.30am Bishops Square Damian Carolan, Partner – Banking Friday 13 June Syndicate democracy: controlling majority lender decisions 12.30pm-1.30pm Bishops Square Richard Hooley, Consultant (Allen & Overy LLP) Tuesday 17 June Managing cross-border investigations 8.30am-9.30am Bishops Square Calum Burnett, Partner – Litigation, Aurélien Hamelle, Partner – Litigation (Paris), Brandon O’Neil, Senior Associate – Litigation Thursday 19 June Cyber-security: managing legal risk 8.30am-9.30am Bishops Square Neville Cordell, Partner – Litigation, Nigel Parker, Senior Associate – Corporate Friday 20 June Ring-fencing retail banks – three different approaches 8.30am-9.30am Bishops Square Bob Penn, Partner – Financial Services Regulatory, Etay Katz, Partner – Financial Services Regulatory Tuesday 24 June What do we do now? An overview of the law of contract part II – termination and remedies 12.30pm-1.30pm Bishops Square Rainer Evers, Senior Associate – Litigation, Jason Rix, Senior PSL – Litigation Wednesday 25 June EU and US sanctions update 8.30am-9.30am Bishops Square Ken Rivlin, Partner – Corporate – Environmental, Matt Townsend, Partner – Corporate Allen & Overy LLP One Bishops Square, London E1 6AD, United Kingdom Tel +44 20 3088 0000 Fax +44 20 3088 0088. If you would like to attend one or more of our seminars, please visit www.aoseminars.com where you can register. If you have any queries or require further information please email [email protected] 2 © Allen & Overy 2014 An Introduction to the 2014 ISDA Credit Derivatives Definitions (8.30am – 9.30am) David Benton Tony Drake-Brockman Summary This seminar will include an introduction to the recently published 2014 ISDA Credit Derivatives Definitions including a brief overview of how the new definitions are being introduced into structured note programmes. © Allen & Overy 2014 3 Speaker biographies David is the Co-head of our Global International Capital Markets group and is based in London. He specialises in derivatives and structured finance transactions and has experience in equity, credit, fund-linked, commodity and other derivatives including repos and stocklending. David's recent work centres on a number of significant issues currently surrounding the derivatives markets, including the eurozone sovereign debt crisis and the testing of key derivatives principles. He regularly acts as counsel to ISDA on a wide range of issues and has been involved in ISDA's documentation, regulatory and law reform activities for many years. He recently advised ISDA on major revisions to the credit derivatives definitions. He also regularly advises the ISDA EMEA Credit Derivatives Determinations Committee. David Benton Partner – ICM – Derivatives & Structured Finance Contact Tel +44 20 3088 3118 [email protected] Tony is the Head of the Derivatives & Structured Finance group. He specialises in all types of structured products and funded derivatives, including credit-linked, equity-linked and commodity-linked securities, warrant issues and fund structures. Increasingly, these transactions are targeted at retail investors. He has advised on numerous credit linked securities issues and programmes for issues of credit linked securities. Tony Drake-Brockman Partner – ICM – Derivatives & Structured Finance Contact Tel +44 20 3088 2802 [email protected] 4 © Allen & Overy 2014 Notes An Introduction to the 2014 ISDA Credit Derivatives Definitions Tuesday 10th June 2014 David Benton and Tony Drake-Brockman © Allen & Overy 2014 © Allen & Overy 2014 ICM:19642309.1 1 5 Notes Reasons for update © Allen & Overy 2014 6 1. First wholesale review since 2003 2. External factors 2 © Allen & Overy 2014 Notes External Factors - Greece Source: The Financial Times © Allen & Overy 2014 © Allen & Overy 2014 3 7 Notes External Factors - SNS Source: The Financial Times © Allen & Overy 2014 8 4 © Allen & Overy 2014 Notes Main Areas of Change: 1. Structural Layout 5. Restructuring Credit Event 2. Financial CDS 6. Reference Obligation 3. Sovereign CDS 7. Successors 4. Qualifying Guarantee 8. Outstanding Principal Balance © Allen & Overy 2014 © Allen & Overy 2014 5 9 Notes Structural Layout 1. Incorporation of all relevant Supplements – Does not include Reference Entity specific Supplements Simplification 2. 3. – reordering of provisions – only one Reference Entity and Reference Obligation – Timing Requirements Event Determination Date definition – Section 1.16 (Standard) and Article XIV (Non-Standard) © Allen & Overy 2014 10 6 © Allen & Overy 2014 Notes Financial CDS: impetus for change © Allen & Overy 2014 © Allen & Overy 2014 1. SNS (expropriation of Bonds) 2. Bankia (FROB restructuring and blocking transfer of subordinated Bonds) 7 11 Notes Financial CDS – Governmental Intervention 1. New Credit Event 4. 2. – But not necessarily on all holders Action taken/announcement by a Governmental Authority 5. 3. © Allen & Overy 2014 12 In a form which is binding Irrespective of whether such event is provided for under the terms of the obligation Pursuant to a restructuring and resolution law or regulation 8 © Allen & Overy 2014 Notes Financial CDS – Asset Package © Allen & Overy 2014 © Allen & Overy 2014 9 13 Notes Financial CDS – Asset Package 1. Can Deliver Asset Package in lieu of Deliverable Obligation if Asset Package Credit Event occurs 4. Prior Deliverable Obligations 2. Must Deliver Asset Package in whole or proportionate part thereof 5. Bullet–Proof Reference Obligation 3. Non-transferable and non-financial assets can form part of Asset Package 6. Ignore contractual bail-in provisions for Deliverability © Allen & Overy 2014 14 10 © Allen & Overy 2014 Notes Financial CDS – Senior/Subordinated division © Allen & Overy 2014 © Allen & Overy 2014 1. Trigger 2. Successor 11 15 Notes Sovereign CDS © Allen & Overy 2014 16 1. Asset Package 2. Package Observable Bonds 12 © Allen & Overy 2014 Notes Qualifying Guarantee: Issues with Qualifying Guarantee definition 1. 2. 3. © Allen & Overy 2014 © Allen & Overy 2014 –transfer provisions –application of caps –status of guarantee which is a Reference Obligation unclear 4. Permitted Transfer 5. Fixed Cap Object is to increase the universe of Qualifying Guarantees Terminology Guarantee = Relevant Guarantee (QAG or QG) Reference Obligation Guarantee 13 17 Notes Restructuring Credit Event 1. Explicitly includes an exchange of Bonds 2. Carves out a “good” Euro exit © Allen & Overy 2014 18 3. Clarifies concept of successor to the euro 14 © Allen & Overy 2014 Notes Standard Reference Obligation © Allen & Overy 2014 © Allen & Overy 2014 1. Why? 2. Process for selecting SROs 3. Replacing the SROs 15 19 Notes Substitute Reference Obligation © Allen & Overy 2014 20 1. More procedural than Section 2.30 2. Different process depending on status of Non-Standard Reference Obligation 16 © Allen & Overy 2014 Notes Successors General Rule 1. – thresholds apply to all entities – no Succession Event definition (other than for Sovereigns) 2. Universal Successor 3. Steps Plan © Allen & Overy 2014 © Allen & Overy 2014 – No Backstop Date 4. Joint and several obligors 5. Eligible Information 17 21 Notes Outstanding Principal Balance Issues with Not Contingent Interaction with Section 8.1 New definition of Outstanding Principal Balance Applies equally to all Obligations, including the Reference Obligation Unclear treatment of Reference Obligations No guidance on determining the outstanding principal balance © Allen & Overy 2014 22 18 © Allen & Overy 2014 Notes Planning points Update Rules (including Standard Reference Obligation and Package Observable Bond Selection Rules) Protocol Implementation date expected to be 20 September 2014 (iTraxx/CDX roll date) © Allen & Overy 2014 © Allen & Overy 2014 19 23 Notes Credit Linked Notes The normal challenges Notes cashflows Maturity and credit protection period Delays © Allen & Overy 2014 24 20 © Allen & Overy 2014 Notes Credit Linked Notes The normal challenges Physical Settlement The disclosure burden © Allen & Overy 2014 © Allen & Overy 2014 21 25 Notes Planning points Implementation for new CLNs © Allen & Overy 2014 26 Implementation for existing CLN hedging 22 © Allen & Overy 2014 Notes Planning points © Allen & Overy 2014 © Allen & Overy 2014 1. Reference Obligation Only Transactions 2. Balance sheet versus repackaging issues 3. Disclosure and investor knowledge 23 27 Notes David Benton Tony Drake-Brockman These are presentation slides only. The information within these slides does not constitute definitive advice and should not be used as the basis for giving definitive advice without checking the primary sources. Allen & Overy means Allen & Overy LLP and/or its affiliated undertakings. The term partner is used to refer to a member of Allen & Overy LLP or an employee or consultant with equivalent standing and qualifications or an individual with equivalent status in one of Allen & Overy LLP's affiliated undertakings. © Allen & Overy 2014 28 24 © Allen & Overy 2014 Notes © Allen & Overy 2014 29 Notes 30 © Allen & Overy 2014 Notes © Allen & Overy 2014 31 Allen & Overy LLP One Bishops Square, London E1 6AD United Kingdom | Tel +44 (0)20 3088 0000 | Fax +44 (0)20 3088 0088 | www.allenovery.com In this document, Allen & Overy means Allen & Overy LLP and/or its affiliated undertakings. The term partner is used to refer to a member of Allen & Overy LLP or an employee or consultant with equivalent standing and qualifications or an individual with equivalent status in one of Allen & Overy LLP's affiliated undertakings. Allen & Overy LLP or an affiliated undertaking has an office in each of: Abu Dhabi, Amsterdam, Antwerp, Athens (representative office), Bangkok, Beijing, Belfast, Bratislava, Brussels, Bucharest (associated office), Budapest, Casablanca, Doha, Dubai, Düsseldorf, Frankfurt, Hamburg, Hanoi, Ho Chi Minh City, Hong Kong, Istanbul, Jakarta (associated office), London, Luxembourg, Madrid, Mannheim, Milan, Moscow, Munich, New York, Paris, Perth, Prague, Riyadh (associated office), Rome, São Paulo, Shanghai, Singapore, Sydney, Tokyo, Warsaw, Washington D.C. and Yangon. | MKT:4317055.1 32 © Allen & Overy 2014
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