Processing credit events as corporate actions allows for a single announcement to be processed against all entities, and creates a consistent workflow between CDXs and other asset classes.
Credit Event Process
Corporate actions involve a two-step process of setting up an announcement, then triggering it.
- Use Add Corporate Action Announcement > Credit Event to create an announcement detailing the factor, dates, and recovery rate
- Interest rebates payable/receivable will be included based on Event Determination Date (65), most recent coupon date of the security, and Pay Date (1275)
- If there are two concurrent credit events for the same CDX, use Corporate Action Sub Priority (3961) to ensure they are processed in the correct order (lower numbers have priority)
- A workflow should be established to ensure the corporate action dates are correct, as there are currently no edit checks
- Trigger the corporate action automatically as part of daily global processing
- It can also be triggered manually using Global Process Center > Corporate Action Processing > Cash Tender/Calls/Puts/Refund/Credit Event
- For Cleared CDX (with variation margin), the impact of each credit event will be included in variation margin on Effective Date (1109) + Business Offset Days (16770)
Credit Event Fields
- Issue Name (961)
- Sweep Date (1197): credit event will processed when corporate actions are triggered for this date
- Effective Date: date the notional reduction will take effect
- Event Determination Date: date to which accruals will be rebated
- Pay Date: date that cash is due to settle
- Business Offset Days: number of business days to offset value submitted for Effective Date to prevent cancelation of prior day's variation margin
- V2015: field is hidden and null
- V2017: field is shown and defaults to 1 for workflows where credit events are processed on
Effective Date
+ 1
- Corporate Action Status (54) =
Released
- Corporate Action Sub Priority: priority with which credit events will be processed (use default of 1 unless there are two or more concurrent credit events)
- Mandatory/Voluntary Indicator (1734) =
Mandatory
- Price (1692): recovery amount set at auction (this will be subtracted from 100 to determine the amount due based on the % of notional reduction)
- Factor Rate (1696): new factor, between 0.99999 and 0.00001 (Rate of Reduction used to process the close will be calculated from this factor)
- Corporate Action Type (1728) =
CREDIT EVENT
Credit Event Example
- Factor = new factor applicable to the index
= Current Factor - Rate of Reduction
= Current Factor - (1 / # of constituents in the index) - % of Notional to Close = Original Face x Rate of Reduction
- $ Payable / Receivable = % of Notional to Close * (100 - Recovery Amount) * Price Multiplier
- Recovery Amount = Price from Corporate Action
Example C shows credit event calculations, including factor and notional adjustments.
Current Factor | Initial # of Constituents | Rate of Reduction (1 / Initial # of Constituents) | New Factor (Current - Rate of Reduction) | Original Face | New Notional | Notional Closed |
---|---|---|---|---|---|---|
1 | 100 | 0.01 | 0.99 | 1,000,000 | 990,000 | 10,000 |
1 | 125 | 0.008 | 0.992 | 1,000,000 | 992,000 | 8,000 |
1 | 80 | 0.0125 | 0.9875 | 1,000,000 | 987,500 | 12,500 |
0.99 | 100 | 0.01 | 0.98 | 1,000,000 | 980,000 | 10,000 |
0.992 | 125 | 0.008 | 0.984 | 1,000,000 | 984,000 | 8,000 |
0.9875 | 80 | 0.0125 | 0.975 | 1,000,000 | 975,000 | 12,500 |
Interest accrues from most recent coupon date up to and including Event Determination Date. There are some exceptions, as shown in Example D below. Rebate is applicable when Event Determination Date < Most Recent Coupon Date < Cash Settlement Date of Credit Event.
Rebates Based on Last Coupon Due Date/Credit Event Payment Date | |||||
---|---|---|---|---|---|
Outside EDD/Next Coupon & No Rebate | Regular Business Day & Rebate | Regular Non-Business Day & Rebate | Maturity Business Day & Rebate | Maturity Non-Business Day & Rebate | |
Previous Coupon Actual Pay Date | 12/1/2008 | 12/22/2008 | 12/22/2008 | 12/22/2008 | 12/22/2008 |
Previous Coupon Adjusted Pay Date | 12/1/2008 | 12/22/2008 | 12/24/2008 | 12/22/2008 | 12/24/2008 |
Next Coupon Actual Pay Date | 3/1/2009 | 3/22/2009 | 3/22/2009 | None | None |
Event Determination Date (EDD) | 12/9/2008 | 12/9/2008 | 12/9/2008 | 12/9/2008 | 12/9/2008 |
EDD + 1 | 12/10/2008 | 12/10/2008 | 12/10/2008 | 12/10/2008 | 12/10/2008 |
Maturity Date | Any | 12/22/2010 | 12/22/2010 | 12/22/2008 | 12/22/2008 |
Credit Event Cash Settlement Date | 1/16/2009 | 1/16/2009 | 1/16/2009 | 1/16/2009 | 1/16/2009 |
Fixed Rate Accrues From Up To and Including | 12/1/2008 12/9/2008 | 9/22/2008 12/21/2008 | 9/22/2008 12/23/2008 | 9/22/2008 12/22/2008 | 9/22/2008 12/22/2008 |
Fixed Amount Pays | 1/16/2009 | 12/22/2008 | 12/24/2008 | 12/22/2008 | 12/24/2008 |
Rebate Accrues From Up To and Including | N/A N/A | 12/10/2008 12/21/2008 | 12/10/2008 12/23/2008 | 12/10/2008 12/22/2008 | 12/10/2008 12/22/2008 |
Previous Accrual Ended | 11/30/2008 | 12/21/2008 | 12/23/2008 | 12/22/2008 | 12/22/2008 |