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Credit Baskets Proposal. CD-FpML Working Group John Weir. Contents. Overview of CreditBasket Product FpML Schema Proposal Discussion. Overview of Credit Baskets. Different classes of Credit Basket Products Index Tranches

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credit baskets proposal

Credit Baskets Proposal

CD-FpML Working Group

John Weir

  • Overview of CreditBasket Product
  • FpML Schema Proposal
  • Discussion
overview of credit baskets
Overview of Credit Baskets

Different classes of Credit Basket Products

  • 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

    • 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
General approach

Based on much of the work done by:

  • Bernard Mullen at Sunguard,
  • Milla Bouklieva and team at Goldman Sachs

Leverage general approach and type definitions from the Default Swap

  • 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

  • Additional sections in General Terms
    • Underlyer - Captures basket constituents in similar style to Equity Swaps
    • Addition of Tranche or Nth to default ‘style’
      • Add Margin schedule around tranche
  • Potential for Multiple Protection Terms
    • 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
    • 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
Credit Baskets::Product
  • Separate FpML Product
    • Multiple sets of protection terms and Settlement terms
  • Similar in style to CDs
credit basket general terms
Credit Basket :: General terms
  • Resues same elements as Cds::General Terms
    • No type extension from Base
  • New Underlyer element in Style of EquitySwap
    • Multiple anonymous choices can confusing to reader (IMHO)
  • Choice of Tranche or NthToDefault
    • Other permutations may be possible
  • New element – Credit position
    • Specify weighting approach
generalterms underlyer
  • Choice of underlyer
    • IndexReferenceInformation as per Cds
    • Collection (basket) of weighted reference information
basket representation
Basket representation

Basket Representation

  • Extends ReferenceInformation Base type
  • References Terms elsewhere
    • 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
‘Style’ of basket
  • Provides support for various flavours
    • Tranche – details next
    • N’th to default

Provide protection only for the losses when credit events occur on “N” Reference entities in the portfolio

    • Do we need to capture the number of defaults to date?
tranche definition
Tranche Definition
  • Defines key aspects of Tranche
    • Attachment point for start of protection
    • Exhaustion point for end of protection
    • Calculated implicit portfolio size (Money)
    • Calculated tranche width
  • Optional Margin schedule
    • See annotations
other terms
Other Terms
  • CreditPosition
    • Provides support for equally weighted or individually specified
  • Settlement Terms / Protection terms as multiples, but each with an xsd:ID and name attribute
  • Questions
    • 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
Questions / Thoughts
  • 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
Graphical Explanation on Index Tranche & Some Terms

Compliments to: Christina Baumhardt

graphical explanation on index tranche some terms14
Graphical Explanation on Index Tranche & Some Terms

Compliments to: Christina Baumhardt