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Practice paper

Sovereign credit default swaps: Managing risks when the fiscal house rumbles

Indra Rajaratnam
Journal of Risk Management in Financial Institutions, 16 (4), 409-426 (2023)
https://doi.org/10.69554/GJAX7784

Abstract

This paper seeks to dissect risks which stem from the features of a sovereign credit default swap under the architecture of the 2014 ISDA Credit Derivatives Definitions (the 2014 Definitions). The paper begins with an overview of the market structure and functions of a sovereign credit default swap, followed by a brief discussion of the landscape behind the product. It then provides a narrative on specific risk considerations, mapped under broad themes such as the Credit Derivatives Physical Settlement Matrix (the Matrix) terms published by the International Swaps and Derivatives Association, Inc. ( ISDA) (including trigger obligations, deliverable obligations, credit events and settlement risk). Examples of Credit Derivatives Determinations Committee (DC) deliberations have been drawn in to elucidate aspects of how the product terms are applied in practice. The goal of the paper is to assist practitioners, infrastructure providers, risk managers, regulators, academics, sovereign issuers and creditors to identify risks and assess the efficiency of sovereign credit default swaps (SOVCDS) as a hedging tool. Due to the vastness of the subject, the paper focuses on SOVCDS traded as a `Standard` transaction type (TType) under the Matrix, where a DC credit event announcement crystallises settlement obligations.

Keywords: credit default swap; credit event; debt distress; Determinations Committee; International Swaps and Derivatives Association, Inc. (ISDA); risk management; sovereign debt; 2014 ISDA Credit Derivatives Definitions

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Author's Biography

Indra Rajaratnam is a consultant solicitor with financial institutions in London. She previously worked for over a decade as Director and Deputy General Counsel with a US investment bank specialising primarily in credit, structured credit/finance, asset backed securities and correlation trading. Indra has participated in several ISDA industry working groups and committees that have shaped many credit derivative products that are traded in the market today, including the working group that worked on the industry reforms that culminated in the publication of the 2014 ISDA Credit Derivatives Definitions. In 2022, Indra published ‘Credit Default Swaps: The Vanilla Essence: Demystifying Product Behaviour and Risk Considerations within a Risk Management Framework’, which focused on risk considerations for the purpose of aligning the product behaviour within a risk management framework. Indra also holds an MBA (specialisation: corporate finance and financial markets) from Imperial College Business School.

Citation

Rajaratnam, Indra (2023, September 1). Sovereign credit default swaps: Managing risks when the fiscal house rumbles. In the Journal of Risk Management in Financial Institutions, Volume 16, Issue 4. https://doi.org/10.69554/GJAX7784.

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cover image, Journal of Risk Management in Financial Institutions
Journal of Risk Management in Financial Institutions
Volume 16 / Issue 4
© Henry Stewart
Publications LLP

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