Transcript Credit Baskets

Credit Baskets Proposal
CD-FpML Working Group
John Weir
Contents
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Overview of CreditBasket Product
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FpML Schema Proposal
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Discussion
Overview of Credit Baskets
Different classes of Credit Basket Products
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Index Tranches
Provides protection on the accumulated losses from credit events that occur
on any of the constituents of the index or basket as a percentage of the
Implied Portfolio size between the attachment and exhaustion points
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Credit Index Tranche on Standard Index (*ITraxx etc)
Credit Index Tranche on Custom Basket of Reference
Entity/Obligations
Nth to default baskets
Provides protection only for the losses when Credit Events occur on ‘N’
reference Entities in the portfolio
General approach
Based on much of the work done by:
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Bernard Mullen at Sunguard,
Milla Bouklieva and team at Goldman Sachs
Leverage general approach and type definitions from the Default Swap
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Based on FpML 4-2 revision
Reuse of the all the key types and elements from the Credit Default swap
Keeps vocabulary consistent while not overloading, nor diluting the definition of the CDS
Some Variations from the Credit Default Swap
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Additional sections in General Terms
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Underlyer - Captures basket constituents in similar style to Equity Swaps
Addition of Tranche or Nth to default ‘style’
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Potential for Multiple Protection Terms
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Add Margin schedule around tranche
Each Entity in a Custom Basket can have specific protection terms. More likely many will share a
couple of common sets
Potential for Multiple Settlement terms
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Each Entity in Custom Basket can have its own settlement Terms, Physical and/or Cash. More likely
many will share a couple of common sets
Credit Baskets::Product
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Separate FpML Product
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Multiple sets of protection
terms and Settlement
terms
Similar in style to CDs
Credit Basket :: General terms
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Resues same elements as
Cds::General Terms
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New Underlyer element in
Style of EquitySwap
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Multiple anonymous choices
can confusing to reader
(IMHO)
Choice of Tranche or
NthToDefault
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No type extension from
Base
Other permutations may be
possible
New element – Credit
position
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Specify weighting approach
GeneralTerms::Underlyer
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Choice of underlyer
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IndexReferenceInformation
as per Cds
Collection (basket) of
weighted reference
information
Basket representation
Basket Representation
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Extends ReferenceInformation Base
type
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References Terms elsewhere
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Holds Reference (href) to Protection
terms associated with this
ReferenceInformation
Holds Reference (href) to Settlement
terms associated with this
ReferenceInformation
Basket constituents can each be
individually weighted – see credit
Position
‘Style’ of basket
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Provides support for
various flavours
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Tranche – details next
N’th to default
Provide protection only for the losses when
credit events occur on “N” Reference
entities in the portfolio
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Do we need to capture
the number of defaults
to date?
Tranche Definition
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Defines key aspects of
Tranche
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Attachment point for start of
protection
Exhaustion point for end of
protection
Calculated implicit portfolio size
(Money)
Calculated tranche width
Optional Margin schedule
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See annotations
Other Terms
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CreditPosition
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Provides support for equally weighted or individually specified
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Settlement Terms / Protection terms as multiples, but each
with an xsd:ID and name attribute
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Questions
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Relationship with Matrix Confirms
How can we check for consistency?
Should these terms be named
Physical and Partial Cash –
Delta Neutral Trading strategy?
Questions / Thoughts
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First stab – needs review and example
flesh out
What are the validation rules
What needs to be added to support
credit events?
Graphical Explanation on Index
Tranche & Some Terms
Compliments to: Christina Baumhardt
100%
750M
Super Senior
10%
75M
Mezzanine
7%
0%
Mezzanine
First Loss
Market/Confirm Terms:
•
Attachment Point: 7%
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Exhaustion Point: 10%
cap of portfolio losses
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Tranche Size:
3%
Exhaustion Point minus Attachment Point
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Original Swap Notional Amount:
USD 22,500,000
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Implicit Portfolio Size:
750M = 22.5M/0.03
Original Swap Notional Amount divided by Tranche Size
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Threshold Amount: 52.5M=750M x 0.07 Implicit Portfolio
Size multiplied by Attachment Point
52.5M
Actual risk being hedged is a fraction of the
reference portfolio notional
Graphical Explanation on Index
Tranche & Some Terms
Compliments to: Christina Baumhardt
Index with 125 Reference Entities
750M
75M
52.5M
0M
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Notional Amount per Reference Entity :
Portfolio Size divided by # Credits 750M/125 = 6M
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Assume a 40% Recovery Rate
- Losses after a credit event (0.6 x 6M = 3.6M)
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The Attachment Point has a Threshold Amount of 52.5M
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After one credit event subordination is reduced from
52.5M to 48.9M
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As losses increase, the subordination buffer decreases
- The protection seller has to start paying out after 14.58
Reference Entities have experienced Credit Events
(14.58)
75.6M (21 Credit Events
with 40% recovery)
54M (15 Credit Events
Protection Seller keeps paying on losses until the Termination
with 40% recovery) Date or until the portfolio has reached its Exhaustion Point
which will require 20.8 Credit Events
Subordination