Credit Derivatives

Overview

A good understanding of credit derivatives is essential knowledge for a full picture of how the credit markets work — for both private sector borrowers and sovereigns. This is particularly true of the bond markets but also of the loan market. This course explains the key features of the main single-name and index credit derivative instruments, the pros and cons of their various applications, and their risks, including that of the documentation. It also includes an outline of the current regulation.

Learning Objectives

On completion, delegates will be able to:

• Understand the key features of single-name and index Credit Default Swaps (CDSs)
• Understand their uses and risks
• Understand how they are priced relative to cash instruments
• Understand how they are marked to market, and how and why the mark-to-market varies with the different instruments
• Understand how they are regulated

Who Should Attend

This seminar is aimed at staff in credit and credit-related markets, including Fixed Income, from front to back office. Some knowledge of the fundamentals of cash credit instruments (bonds and/or loans) is assumed. Staff from the following areas would benefit:

• Credit and Fixed Income origination, trading and sales
• Treasurers
• Risk management
• Regulatory capital management
• Investors
• Analysts
• Regulators and supervisors
• Lawyers

Agenda

• Key features of single-name Credit Default Swaps (CDSs) — defining a credit derivative; key terms of the single-name CDS (reference entity, spread, credit events, settlement); standardised coupons and up-front payments; bank regulatory capital treatment, central clearing, bilateral margining
• Applications of single-name CDSs — evolution of the market before and after the crisis; hedging loan and bond exposures; pricing new bond issues; the universe of traded names and liquidity issues
• Documentation and the settlement process — the 2014 ISDA Definitions and Confirmation; credit events (bankruptcy, failure to pay, restructuring); the ISDA Determinations Committee; the auction process; orphaning risk; "manufactured" credit events
• Pricing and risk managing single-name CDSs — the asset swap spread and the basis; marking a CDS to market; CS01s and convexity; curve trades and curve inversions
• Other types of single-name CDSs — subordinated CDSs; senior v sub pricing; Loan CDSs (LCDSs); sovereign CDSs (currency issues, quantos, EU shorting rules)
• Index swaps and swaptions — key features and the various indices; index applications (bank loan portfolio hedging, macro trading); central clearing and margining; index credit default swaptions; tranched index swaps and the base correlation curve