CDX Credit Event Processing Notes

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.

1. Use Add Corporate Action Announcement > Credit Event to create an announcement detailing the factor, dates, and recovery rate

   1. Interest rebates payable/receivable will be included based on Event Determination Date (65), most recent coupon date of the security, and Pay Date (1275)

   2. 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)

   3. A workflow should be established to ensure the corporate action dates are correct, as there are currently no edit checks

2. Trigger the corporate action automatically as part of daily global processing

   1. It can also be triggered manually using Global Process Center > Corporate Action Processing > Cash Tender/Calls/Puts/Refund/Credit Event

   2. 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

  • V15: field is hidden and null

  • V17: 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.

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.

Cancel & Rebook (Bilateral/No Variation Margin)

• When processing a new credit event predating one that has already been processed, the prior credit event must be canceled before triggering the new one; both credit events can then be rerun in the correct order

• To correct a credit event that has already been processed it must canceled and reprocessed

  • Alternately, the status can be changed back to pending and the record manually deleted after running the global process to cancel corporate actions

  • The corporate action global process can then be rerun for the appropriate Sweep Date; Eagle Accounting rollback/replay will reverse the earlier events and cancel the entries and adjustments

Roll (V17 R2)

When credit events occur CDXs start trading on a new factor and a new "series" of the CDX is issued. This new series has identical terms and conditions, with the exception of a change to the identifier. Beginning in V17 R2 existing positions can be rolled to the new series using an Exchange Offer corporate action. This allows a single announcement to be processed against all entities holding the CDX. Applying the corporate action is a two-step process as described below.

• Set up Exchange Offer corporate action announcement

  • From Issue Name (961): Issue Name of old CDX series

  • Sweep Date (1197): roll will be processed when corporate actions are triggered for this date

  • Ex Date (65): date on which roll activity will occur

  • Exchange Offer Type (2291) = Rate

  • Cost Allocation Rate (1279): typically 1.00 to roll position on a 1-to-1 basis

  • To Issue Name (1141): Issue Name of new CDX series

  • Corporate Action Type = Exchange Offer

• Trigger corporate action manually via global processing or automatically using an automated job; both methods rely on the Merger/Exchange Offer/Assimilation/etc. job

  • Note: currently this can only be triggered for One Entity/All Securities and All Entities/All Securities