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

Indra Rajaratnam
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Indra Rajaratnam: Solicitor of England and Wales and Author of ‘Credit Default Swaps: The Vanilla Essence (Risk Books)’, UK

Journal of Risk Management in Financial Institutions, 2023, vol. 16, issue 4, 409-426

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 (search for similar items in EconPapers)
JEL-codes: E5 G2 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:aza:rmfi00:y:2023:v:16:i:4:p:409-426

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