ISDA has prepared this brief summary of frequently asked questions to assist in your consideration of the 2009 General Motors Corporation Auction (the “Auction”).
THIS FREQUENTLY ASKED QUESTIONS DOES NOT PURPORT TO BE AND SHOULD NOT BE CONSIDERED A GUIDE TO OR AN EXPLANATION OF ALL RELEVANT ISSUES OR CONSIDERATIONS IN CONNECTION WITH THE BOWATER AUCTION. PARTIES SHOULD CONSULT WITH THEIR LEGAL ADVISERS AND ANY OTHER ADVISER THEY DEEM APPROPRIATE. ISDA ASSUMES NO RESPONSIBILITY FOR ANY USE TO WHICH ANY OF ITS DOCUMENTATION OR OTHER DOCUMENTATION MAY BE PUT. |
INDEX:
Credit Event and Auction
Why was there no Protocol for this Credit Event?
How do I find out whether my firm adhered to the Big Bang Protocol?
How do we trigger a contract where a credit event has been declared by the DC?
We have signed up to the Big Bang Protocol, will we still be able to settle trades outside of the auction on a trade by trade basis? If so, will each trade that is to be settled outside of the auction need to be bilaterally agreed with the relevant counterparty?
How do I incorporate the terms of the Supplement into to my transactions?
Scope of Transaction Coverage Relating to the Auction
Which credit derivatives transactions are covered by the Auction?
What credit derivative transactions are not affected by the Auction?
Auction
Who runs the Auction?
When is the Auction?
Physical Settlement through the Auction
I want to physically settle through the Auction. What do I have to do?
How do I Physically Settle trades in the auction if I did not sign up to the Big Bang Protocol?
If I want to deliver Deliverable Obligations in a currency other than the auction currency, how is the FX calculated?
Settlement and Accruals
When is the settlement date?
How are accruals calculated?
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Credit Event and Auction
Why was there no Protocol for this Credit Event?
The Big Bang protocol replaced the individual protocols for future auctions (ISDA will not be publishing individual protocols for CDS Auctions going forward). Auction covered transactions under the Big Bang protocol are automatically within the scope of the Auction with no need (or opportunity) for parties to "opt in" to the Auction.
How do I find out whether my firm adhered to the Big Bang Protocol?
Click here for a list of adherents to the Big Bang Protocol.
How do we trigger a contract where a credit event has been declared by the DC?
For all credit events except Restructuring, CDS contracts that incorporate the March 2009 Supplement (the "Supplement") or that are covered by the Big Bang Protocol will be automatically triggered by the DC's declaration. There is no need to send credit event notices or to sign a Uniform Settlement Agreement.
We have signed up to the Big Bang Protocol, will we still be able to settle trades outside of the auction on a trade by trade basis? If so, will each trade that is to be settled outside of the auction need to be bilaterally agreed with the relevant counterparty?
You would need to exclude the trades with other counterparties that sign up to the protocol (assuming that the trades are covered transactions under the protocol) on a bilateral basis. You can do that at any time, but it requires agreement from your counterparty to make this change.
How do I incorporate the terms of the Supplement into my transactions?
The Supplement applies to transactions going forward, provided that the Confirmation incorporates the Supplement. The Supplement can be expressly incorporated by the parties or will automatically be incorporated in trades confirmed in DTCC or using the ISDA Credit Derivatives Physical Settlement Matrix on or after April 8, 2009. In addition, to the extent that the parties have both adhered to the Big Bang Protocol, the Supplement will be deemed incorporated into Protocol Covered Transactions entered into until 31 January 2011.
Scope of Transaction Coverage Relating to the Auction
Which credit derivatives transactions are covered by the Auction?
Unless explicitly excluded from an Auction, a wide variety of credit derivative transactions are covered by the Auction, including single name CDS trades and index credit derivative transactions referencing the Reference Entity and also the following transactions: Constant Maturity Swap Transaction, a Principal Only Transaction, an Interest Only Transaction, First to Default Transaction, Nth to Default Transaction, Recovery Lock Transaction, Bespoke Portfolio Transaction (which term would include portfolio transactions relating to TRAC-X, JPMorgan HYDI and Tracers indexes), Single-Name Swaption and Portfolio Swaption. Reference Obligation only, Fixed Recovery, Preferred CDS, or Party Specified Non-Auction Transactions
What credit derivative transactions are not affected by the Auction?
The following credit derivative transactions are excluded from the scope of the Auction Settlement Terms:
- Loan Only transactions;
- Reference Obligation Only transactions;
- Fixed Recovery transactions; and
- Preferred CDS transactions.
Auction
Who runs the auction?
The auction will be administered by Creditex and Markit and not by ISDA.
When is the auction?
The auction will take place on Friday June 12, 2009. Details of the auction results will be posted at www.creditfixings.com.
Physical Settlement through the Auction
I want to physically settle through the auction. What do I have to do?
Parties who wish to deliver or receive Deliverable Obligations may place a Physical Settlement Request with a Participating Bidder. A Physical Settlement Request is an order to sell or buy Deliverable Obligations at the Final Price. Any customer that wishes to submit a Customer Physical Settlement Request to a Participating Bidder must submit a valid Customer Physical Settlement Request Letter to the relevant Participating Bidder on or prior to 5:00 p.m. New York time on the Business Day prior to the Auction Date. Following the auction, parties who submitted a Physical Settlement Sell Request must send a Notice of Physical Settlement to the relevant Participating Bidder, specifying which Deliverable Obligations they will deliver. A form of the Notice of Physical Settlement is contained as an exhibit in the Protocol document. The deadline for sending this notice is specified as the "Notice of Physical Settlement Date" in the Protocol.
How do I Physically Settle trades in the auction?
As for previous CDS auctions, parties can obtain the same economic outcome as physical settlement by submitting a Physical Settlement Request into the auction. If the DC decides to hold an auction, parties will not have the option to physically settle prior to the auction, unless agreed bilaterally with the counterparty.
Where there is an auction, the CDS transaction covered by the Protocol will cash settle using the Final Price. However parties to a covered transaction have the ability to submit (through a Participating Bidder) a Physical Settlement Buy or Sell Request. This will create another, second transaction in the auction - a RAST - and the seller will deliver a Deliverable Obligation for payment of the Final Price. These two transactions together will mean that a party can obtain the same economic outcome as physical settlement - a Protection Buyer, for example would have his covered transaction settled at 1 - Final Price but could enter into a RAST by submitting a Physical Settlement Sell Request and deliver a Deliverable Obligation as it would have done in a physical settlement for payment of the Final Price resulting in delivery of the Deliverable Obligation and receipt of in total 1.
Settlement of the RAST is by delivery / receipt of a Deliverable Obligation. It is important to note that this could include a loan. It may not be possible to guarantee receipt/delivery of a bond.
If an entity doesn't submit a Physical Settlement Request it will simply have its covered transaction cash settled using the Final Price.
If I want to deliver Deliverable Obligations in a currency other than the auction currency, how is the FX calculated?
All Physical Settlement Requests and Limit Order Submissions are denominated in the auction currency, however for trades generated by the matching of these orders, Deliverable Obligations denominated in certain other currencies may be delivered. In this case, the FX rate used to calculate how much of the non-auction currency Deliverable Obligation may be delivered is determined as follows:
- The Currency Rate will be fixed on the Business Day (for auctions in the Americas) or two Business Days (for auctions outside the Americas) prior to the Auction Date by reference to the WM/Reuters 4pm London mid-point rate.
- If Buyer amends its Notice of Physical Settlement to include a Deliverable Obligation in a different currency from the Deliverable Obligation it is replacing, the Revised Currency Rate for the new Deliverable Obligation will be determined by reference to the spot rate between the currency of the removed Deliverable Obligation and that of the new Deliverable Obligation, as published on the following Business Day by WM/Reuters at 4pm London time. This calculation is only made in respect of a Deliverable Obligation being replaced (and hence any other Deliverable Obligation that remains in the NOPS shall be unaffected).
Settlement Date and Accruals
When is the settlement date for covered transactions?
The settlement date for covered transactions is expected to be June 18, 2009.
How are accruals calculated?
Depending on the timing of the auction settlement process relative to standard payment dates for CDS contracts, accruals are calculated and settled using either a "stub accrual" methodology or a "full coupon and rebate" methodology. Please see below for the methodology applied to the Auction and further explanation of these methodologies.
For GM, the 'stub accrual' methodology will apply. Fixed Rate will accrue to and including the Common Event Determination Date, which is June 1, 2009.
Under the "stub accrual" methodology, the Fixed Rate in respect of the relevant Reference Entity accrues from and including the previous payment date (or the Effective Date if it is the first accrual period) to and including the Common Event Determination Date and the resulting Fixed Amount in respect of the relevant Reference Entity is paid on the Cash Settlement Date. For tranche transactions, the "resulting Fixed Amount" is the accrual on the loss amount or recovery amount incurred on the relevant tranche (if any).
The "full coupon and rebate" methodology is generally applied when a standard CDS contract payment date (the "Affected Payment Date") occurs after the Event Determination Date, but before the auction settlement process is completed. This reflects the same economics as the "stub accrual" methodology (i.e. Fixed Rate accrues to and including the Common Event Determination Date), but the payment mechanics are different in order to facilitate settlement. Under the "full coupon and rebate" methodology, the Fixed Rate in respect of the relevant Reference Entity accrues from and including the previous payment date (or the Effective Date if it is the first accrual period) to but excluding the Affected Payment Date for purposes of the payment due on that date (unless the transaction matures on that date), i.e. "full coupon" is paid on that date. However, a rebate of the Fixed Rate accrual in respect of the relevant Reference Entity for the period from and including the calendar day after the Common Event Determination Date, to but excluding the Affected Payment Date, will be added to the Cash Settlement Amount to be paid to Buyer on the Cash Settlement Date. For tranche transactions, the "Fixed Rate accrual in respect of the relevant Reference Entity" is the accrual on the loss amount or recovery amount incurred on the relevant tranche (if any). For avoidance of doubt, in the "full coupon and rebate" the accrual for the "full coupon" is calculated on the pre-event total recovery and loss whereas the rebate is calculated using the event loss amount or recovery amount incurred. If the relevant transaction matures on the Affected Payment Date, the accrual is to and including the Affected Payment Date, then the Fixed Rate and the rebate will accrue to AND INCLUDING the Affected Payment Date. Finally, please note that if the Affected Payment Date falls on a non-business day, then the end of the accrual period for purposes of the Fixed Rate accrual and the rebate will adjust to the following business day, EXCEPT where the transaction matures on the Affected Payment Date, in which case it does NOT adjust, pursuant to Section 1.6 of the 2003 ISDA Credit Derivatives Definitions.
This information is summarized in the table below for the various payment date scenarios:
Payment Date Scenario |
Methodology Applicable |
Fixed Rate Accrues From and including |
Fixed Rate accrues to |
Resulting Fixed Amount Paid |
Rebate accrues from and including |
Rebate accrues to |
Rebate paid |
Payment Date at some time outside the auction settlement process |
"Stub accrual" |
Previous payment date/Effective Date |
To and including Common Event Determination Date |
Cash Settlement Date |
N/A |
N/A |
N/A |
Payment Date occurs on business day during auction settlement process, trade does not mature on that date |
"Full coupon and rebate" |
Previous payment date/Effective Date |
To but excluding Affected Payment Date |
Affected Payment Date |
Day after Common Event Determination Date |
To but excluding Affected Payment Date |
Cash Settlement Date |
Payment Date occurs on business day during auction settlement process, trade matures on that date |
"Full coupon and rebate" |
Previous payment date/Effective Date |
To and including Affected Payment Date |
Affected Payment Date |
Day after Common Event Determination Date |
To and including Affected Payment Date |
Cash Settlement Date |
Payment Date occurs on non-business day during auction settlement process, trade does not mature on that date |
"Full coupon and rebate" |
Previous payment date/Effective Date |
To but excluding ADJUSTED Affected Payment Date |
ADJUSTED Affected Payment Date |
Day after Common Event Determination Date |
To but excluding ADJUSTED Affected Payment Date |
Cash Settlement Date |
Payment Date occurs on non-business day during auction settlement process, trade matures on that date |
"Full coupon and rebate" |
Previous payment date/Effective Date |
To and including NON-ADJUSTED Affected Payment Date |
ADJUSTED Affected Payment Date |
Day after Common Event Determination Date |
To and including NON-ADJUSTED Affected Payment Date |
Cash Settlement Date |
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