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Posted in Contributors- Economic and Financial, Other Guys, Taken Down

3 days to cure – Sober Look

This is a syndicated repost courtesy of Sober Look. To view original, click here. Reposted with permission.

Credit Suisse recently pointed out an important fact about US sovereign credit default swap (CDS) mechanics. US CDS is based on treasuries (linked to a specific security – the co-called “reference obligation”), which according to the official offering document (see offering circular here), do not have a “grace period”. Under such circumstances sovereign CDS documents dictate that the grace period is three days before an event of default is declared. That means if the US Treasury fails to make a principal or interest payment on any treasury security, an ISDA credit event will be triggered after three days. Markets move much faster than politicians.

Credit Suisse: – For US CDS, one of the important points is that there is no stated “grace period” in the Uniform Offering Circular for Treasury securities. Therefore CDS documents state that a failure to pay principal or coupon can be cured in three days before an ISDA credit event is declared. Although a single Treasury security is the “reference obligation,” any Treasury security that is pari passu to this obligation could cause a credit event – as long as it was not cured in three days.

SoberLook.com

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