"Manufactured" Credit Events and proposed amendments to the 2014 ISDA Credit Derivative Definitions

ISDA’s proposed amendments aim to address recent issues in the CDS market relating to "manufactured" Credit Events.

An ISDA working group comprising the ISDA Credit Steering Committee and certain market participants have published proposed amendments to the 2014 Credit Derivative Definitions (the CDDs) to address issues relating to narrowly tailored credit events. The proposed amendments are available on the ISDA website.

Although not directly referred to by ISDA, these changes seek to address concerns raised in relation to a number of recent "unconventional" Credit Events, including iHeart and Hovnanian.


Narrowly tailored credit events (NTCEs) are arrangements which cause a Credit Event under a CDS contract but have no or minimal impact on creditworthiness or financial condition of the Reference Entity.

The rationale for the amendments is the CDS market can only reliably measure credit risk on the premise that the Reference Entity will seek to avoid default. NTCEs call that premise into question. Following some high profile examples of NTCEs, ISDA committed to consult on amendments to the CDDs to protect the integrity of the CDS market.

Proposed amendments

The proposal adds a "Credit Deterioration Requirement" to the Failure to Pay Credit Event. This will exclude from Failure to Pay any Credit Event that does not result from or in the deterioration of the creditworthiness or financial condition of the Reference Entity.

The proposal includes interpretative guidance with examples of when the Credit Deterioration Requirement will not be met. Examples include, without limitation, where the default (i) arises from agreement with the Reference Entity with the purpose of creating a benefit under a CDS contract, (ii) does not result from acceleration of other debt obligations, or (iii) is promptly cured following a grace period.

The Determinations Committee will determine if the test is met, taking into account all information available at the time, without obligation to investigate.

Note the Credit Deterioration Requirement only applies if specified as applicable in the relevant Confirmation.

Next steps

Feedback on the proposed amendments can be provided to ISDA by 27 March 2019 by email to isdalegal@isda.org with the subject “NTCE Proposal Feedback”.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.