Overview

Credit events are processed using Eagle's core corporate action functionality. This allows a single announcement to be processed against all entities and creates a consistent workflow between Credit Default Index Swaps (CDX) and other asset classes.

The key dates on the credit event notice are event determination date, auction date, and settlement date. In addition to the cashflow based on the notional reduction and recovery rate, interest that accrued between event determination date and the effective date of the notional reduction (typically auction date + 1) is rebated and/or backed out.

• Cleared: the full amount is rebated

• Bilateral

  • Not Spanning Coupon Date: the full amount is backed out

  • Spanning Coupon Date: the amount accrued between event determination date and the coupon date is rebated and the amount accrued between the coupon date and effective date of the notional reduction is backed out

Process

Corporate actions involve a two-step process of setting up an announcement, then triggering it.

1. Use Create Credit Event in Reference Data Center > Reference Desk > Corporate Actions > Announcements to create the announcement detailing the factor, dates, and recovery rate

2. Trigger the corporate action

   1. This will typically be scheduled as part of Eagle's daily global workflow

   2. This can be done manually using Accounting Center > Processing and Exceptions > Global Processes > Corporate Actions > Cash Tender/Calls/Puts/Refund/Credit Event Processing

   3. 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)

Fields

• Issue Name (961)

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

• Effective Date (1109): date the notional reduction will take effect

• Event Determination Date (65): date from which accruals will be rebated

• Pay Date (1275): date cash settles

• Business Offset Days (16770): number of business days to offset value submitted for Effective Date to prevent cancelation of prior day's variation margin

  • Only available for CDX with Cleared Security (5027) = Y

  • V17: field is shown and defaults to 1 for workflows where credit events are processed on Effective Date + 1

  • V15: field is hidden and null

• Corporate Action Status (54) = Released

• Corporate Action Sub Priority (3961): processing priority (lower numbers are processed first)

  • 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.

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