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Loan only credit default swapsthe new European

standard form
Martin Bartlam and Karin Artmann*

Key points

1. General
The long-anticipated final form of Loan Only Credit Default Swap (LCDS)
documentation was finally published by the International Swaps and Derivatives
Association, Inc. (ISDA) on 30 July 2007 in the form of the ISDA Standard Terms
Supplement and Form of Confirmation for use with Credit Derivatives Transactions on
Leveraged Loans (the European LCDS). This incorporates the 2003 Credit Derivatives
Definitions as supplemented by the May 2003 supplement thereto (together with, and as
amended in, the European LCDS, the Credit Derivatives Definitions).
In our previous article1, we provided an overview of the motivation of market
participants which greatly influenced the form of the European LCDS draft documentation first circulated on 2 May 2006 in the form of the General Terms Confirmation for
Credit Derivatives Transactions in Leveraged Loans (the Draft LCDS) and looked at the
main differences between the European form and the Syndicated Secured Loan Credit
Default Swap Standard Terms Supplement published by ISDA on 8 June 2006 and
replaced on 22 May 2007 (the US LCDS).
The main issues with regard to the Draft LCDS related to cancellability, Restructuring
as a Credit Event and public versus private information. It is important to bear

*
1

Martin Bartlam (Partner) and Karin Artmann (Senior Associate), Orrick, Herrington & Sutcliffe, London.
Loan only credit default swapsthe story so farCapital Markets Law Journal, Volume 2 Number 3.

The Author (2007). Published by Oxford University Press. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org

doi:10.1093/cmlj/kmm031

Advance Access publication 17 October 2007

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 European Loan Only Credit Default Swap (LCDS) documentation was published by the
International Swaps & Derivatives Association, Inc. in the form of a Standard Terms Supplement
and Form of Confirmation for use with Credit Derivative Transactions on Leveraged Loans on 30 July
2007 (the European LCDS).
 This article reviews some of the changes that have been made since the first circulation of the draft
European LCDS documentation on 2 May 2006 (the Draft LCDS).
 A comparison between the Draft LCDS, the current form of the European LCDS and the US LCDS
(defined in the article below) provides an insight into how the development of the European LCDS
has required a compromise to be made between the needs and demands of various market
participants and the specifics of the European leveraged loan market (as more fully described in our
recent article1) and indicates points of convergence between the market-standard documentation
for Europe and the United States.

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415

2. What has remained unchanged?

Reference Obligation-based
The European LCDS remains a Reference Obligation-based document, ie the contract
looks through the borrowing or guaranteeing entity (the Reference Entity) to the actual
underlying obligation, (ie the specified syndicated secured loan or the Reference
Obligation). Similar to the Draft LCDS, the Reference Obligation may comprise credit
facilities with drawn or undrawn commitments.
The Reference Obligation is:
(i) a Designated Tranche: a tranche/facility (a) constituting a Loan specified in the
Confirmation or if not identified, each tranche/facility which is a Loan under the
Reference Credit Agreement (specified in the Confirmation) or (b) determined in
accordance with Section 2.30 of the Credit Derivatives Definitions; and
(ii) an Additional Tranche: a tranche/facility which is a Loan provided (a) it is secured
over the same assets as secure one or more Designated Tranches and is entitled
to receipt of proceeds from the enforcement of such security and (b) benefits from
the same or equivalent guarantee(s) and other collateral as one or more of the
Designated Tranches, in each case with a priority or ranking which is equal to that of
the security/entitlement and guarantee(s)/collateral applicable to such Designated
Tranches.

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in mind that, as with the US LCDS, the Draft LCDS was intended to deal with specific
concerns of market participants in the market in which the instrument was to be used.
Whilst different from the US LCDS and from the ultimate form of the European LCDS,
the cancellable structure of the Draft LCDS dealt with specific hedging requirements of
end users. The cancellable form itself was adequate for the purposes for which it was
intended and for example provided the documentational basis for LevX, a leveraged loan
credit default swap index product. The cancellability of the Draft LCDS was, however,
viewed as a problem in creating an effective, liquid instrument for credit trading.
The European LCDS has therefore moved on to accommodate the requirements for a
trading instrument but at the same time retaining flexibility through some optionality.
Essentially however, it has become a non-cancellable product for Credit Derivatives
Transactions on European Leveraged Loans. The European LCDS therefore looks closer
to the US LCDS in many ways, albeit in a different form that caters for the specific issues
that characterize the European leveraged loan market. Thus the European LCDS sets out
a compromise position, a half-way house, between the cancellability of the Draft LCDS
upon the full redemption, repayment or other discharge of the underlying Reference
Obligation and the continuity of the US LCDS with its requirement for substitution
of the underlying in the event of early redemption of the Reference Obligation. Time will
tell how and whether there will be further convergence between the European LCDS
and the US LCDS.

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Reference Entity
The Reference Entity determination remains unchanged. It is still essentially any person
who is a borrower or has an entitlement to the benefit of any credit, a guarantor, obligor
or other surety in respect of any Reference Obligation.
Deliverable Obligations

Restructuring as Credit Event

The European LCDS has, subject to modifications discussed under the heading Credit
Events and Restructuring, retained Restructuring as a Credit Event in order to be able to
obtain full capital relief under Basle II (all other conditions in relation thereto being
satisfied).
Physical Settlement
Physical Settlement remains the default settlement method for the European LCDS.
However, Cash Settlement provisions different to those in the Draft LCDS have been
introduced and are discussed under the heading Settlement.
Cancellability
Cancellation of the Credit Derivatives Transaction on redemption, repayment or other
discharge of the underlying Reference Obligations in full was one of the main features
of the Draft LCDS. It was introduced to satisfy the needs of market participants
which sought to use the LCDS product for hedging purposes. The rationale behind this
cancellation was that the LCDS product should, as closely as possible, match the
underlying Reference Obligation. When that Reference Obligation is repaid, redeemed
or otherwise discharged in full, the hedge relating to such Reference Obligation should
also come to an end.
The European LCDS has retained the ability of parties to elect cancellability
(see Continuity below) with zero-cost termination upon the full repayment, redemption
or other discharge of the Reference Obligation. However, this is now an option that
the parties must expressly choose in the Confirmation. It will be interesting to see how
much liquidity the market will offer this cancellable version of the European LCDS.

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The provisions for Deliverable Obligations have broadly remained the same. It is still
Reference Obligation Only and, in addition, permits the delivery of any obligation of the
Reference Entity which is a Loan secured over the same assets as secure one or more
of the Reference Obligations, entitled to the proceeds of the enforcement of the security
and benefiting from the same or equivalent guarantees and other collateral as one or
more of the Reference Obligations, in each case having a priority or ranking at least
equal to one or more Reference Obligations or the guarantees/collateral relating to
one of more Reference Obligations, as applicable (a Senior Loan). The Deliverable
Obligation Characteristic Specified Currency included has been added (see Deliverable
Obligations below).

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Trading participants will be relieved to have continuity in respect of their trades without
the risk of the trade disappearing if the underlying facility or tranche is repaid. Hedging
counterparties will still be able to elect cancellability where possible but may have to agree
to the non-cancellable form to benefit from greater liquidity. If this is the case, such
parties will have to manage their exposures in other ways, including by entering into
offsetting swaps.

Continuity
The European LCDS has now adapted an essentially continuous format.
If the Confirmation stipulates Continuity: Applicable or no election is made, the
provisions of Section 2.30 provide a mechanism for the substitution of any redeemed,
repaid or otherwise discharged Reference Obligations, unless:
(i) the Calculation Agent determines that no Substitute Reference Obligation will be
identified; or
(ii) a Substitute Reference Obligation has not been identified by either of the parties to
the European LCDS by the 100th day after the date of the Refinancing,
in which case, such relevant day will, in the case of (i) and (ii), be the Scheduled
Termination Date and on that day the Notional Amount will be reduced to zero. The
European LCDS will terminate at zero-cost.
Determination of Continuity, which requires the identification of a Substitute
Reference Obligation, is a two-stage process which is triggered by Refinancing.
This process can be viewed as follows:
(i) Has a Refinancing occurred? If, yes, is there a Qualifying Credit Agreement (defined
under the heading Refinancing)? If yes, is there a successor credit agreement
(a Successor Credit Agreement)?
(ii) If there is a Successor Credit Agreement, what are the Substitute Reference
Obligation(s) under such Successor Credit Agreement?
It is generally the Calculation Agent who makes the relevant determinations based on
the Source Material (defined under Refinancing) and percentage tests, in each case
stipulated in the European LCDS. This marks a difference to the US LCDS which utilizes
a market standard to achieve substitution.
If the Confirmation stipulates Continuity: Not Applicable, the provisions of Section
2.30 of the Credit Derivatives Definitions will not apply, the Scheduled Termination Date
and the reduction of the Notional Amount to zero will occur on the latest date on which
the funded portion of the Reference Obligations under the European LCDS is redeemed,
repaid or otherwise discharged in full (and no commitments attributable to the Reference
Obligations are available for utilization). Again, the European LCDS will terminate
at zero-cost.

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3. What has changed?

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Refinancing

Refinancing

Refinancing occurs where:

(i) a funded commitment of the Reference Obligation is directly/indirectly repaid,
in whole or in part by proceeds of a drawdown of one or more tranches under
a Credit Agreement which are, or are required to be, Secured;
(ii) all or any assets securing the Reference Obligation are directly/indirectly acquired
by the proceeds of the drawdown of one or more tranches/facilities under the
Credit Agreement which are, or are required to be, Secured; or
(iii) all or any part of the assets securing the Reference Obligation cease to secure the
Reference Obligation and instead secure one of more tranches/facilities which have
been drawn down under the Credit Agreement and which are, or are required to be,
Secured.
Secured essentially means a loan (tranche/facility) which is secured on any assets and
entitled to receipt of the enforcement proceeds of the security where such security and
entitlement have a priority/ranking equal to that of the Reference Obligation immediately
prior to the Refinancing. It is worth noting that this definition is neither concerned with
the identification of the assets which are subject to the security, nor their value.
Designation of the Successor Credit Agreement

If the Calculation Agent determines that a Refinancing has occurred, it can designate
a Successor Credit Agreement on any day from and including the day on which the
Refinancing occurred to and including the day falling 90 calendar days after the date of
the Refinancing. If it has not done so, or has not, on or prior to such 90th calendar day,
made a determination that there will be no Successor Credit Agreement, either of the two
parties to the European LCDS may, for the period from but excluding the 90th calendar
day after the Refinancing to and including the 100th calendar day following the date of
the Refinancing, designate, in good faith and a commercially reasonable manner,
a Successor Credit Agreement based on the Source Material available to the party during
the original 90 calendar day period.
It should be noted here that other than in respect of Source Material published
by Markit Group Limited as described above, the determination of the Successor Credit

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Refinancing can occur at any time from, and including, the Effective Date to, but
excluding, the Event Determination Date in the circumstances set out below. Whether or
not a Refinancing has occurred will be determined by the Calculation Agent by reference
to (i) the executed Credit Agreement, (ii) any information from or published by the
borrower, guarantor, obligor, other surety or the agent bank in relation to the executed
Credit Agreement or (iii) relevant information published by Markit Group Limited or
its successor (together, the Source Material). In order to make its determination,
the Calculation Agent can rely on any purpose clause in a Credit Agreement as prima
facie evidence of the purpose of such Credit Agreement.

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419

Designation of Substitute Reference Obligation

If the Confirmation stipulates Continuity: Applicable (or no election is made) and

a Refinancing has occurred, the Calculation Agent or any party to the European LCDS
may, as described above, designate a Successor Credit Agreement. Thereafter, the
Calculation Agent will, in accordance with the procedure detailed below, designate
a Substitute Reference Obligation that ensures the continuity of the European LCDS
despite any redemption, repayment or other discharge of the initial Reference Obligation
in whole or in part. The tests below ensure that each Substitute Reference Obligation
is of a sufficient size given that it will become part of a separate Credit Derivatives
Transaction:
(i) Substitute Reference Obligation is one or more facilities/tranches under a Successor
Credit Agreement.
If following Refinancing, more than 75 per cent of the aggregate pre-Refinancing
commitment outstanding of the Reference Obligations is redeemed, repaid or
otherwise discharged in full and the unfunded portion is no longer available for
utilization (refinanced) and there is only one credit agreement (other than the
original credit agreement) which satisfies the Refinancing criteria described above
(the Qualifying Credit Agreement), then the Qualifying Credit Agreement shall be
the sole Successor Credit Agreement for the entire Credit Derivatives Transaction
and the original Reference Obligations cease to be the Reference Obligations provided
however, following the Refinancing, the post-Refinancing commitment outstanding

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Agreement may be based on confidential information which may only be available to the
Calculation Agent if it is either a lender of record or indirect participant in the Reference
Obligation documented by the relevant Credit Agreement. Hence, it is important to
consider, at the outset, the potential for a lack of information on the determination of
a Successor Credit Agreement or that confidential information may be restricted in
connection therewith. The European LCDS does not resolve the private versus public
information issue per se, but deals with it through certain prohibitions in the form of
additional representations and agreements by the parties, including the Calculation Agent
(see Credit Events and Restructuring below). It effectively pushes the risk related to the
need for, or use of, confidential information onto the Buyer and Seller where the
Calculation Agent has access to confidential information but is not able to disclose it or,
in the case of the Buyer and/or Seller, is not able to receive such information. If such
confidential information cannot be disclosed or received, the contractual parties are
nevertheless bound to accept any determination made by the other party pursuant to
such information. It will be interesting to see how this issue will be dealt with in practice
where the Calculation Agent has no access to confidential information and to what extent
organizations such as the Loan Market Association (LMA) and the European High Yield
Association are able to motivate sponsors to make more of such information public.
This may well require changes in other areas, not least in the attitude of the borrower
community.

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in relation to each tranches/facilities under the Qualifying Credit Agreement

which are Secured is an amount equal to at least 25 per cent of the aggregate
pre-Refinancing commitments outstanding of the Reference Obligations and
Specified Currency is satisfied in relation to one or more tranches/facilities that
are Secured under such Qualifying Credit Agreement.
If this is the case, the Credit Derivative Transaction continues with the Successor
Credit Agreement constituting the Reference Credit Agreement, each tranche/facility
under the Successor Credit Agreement which is Secured and satisfies Specified
Currency is a Substitute Reference Obligation which is a Designated Tranche and all
other terms of the original Credit Derivatives Transaction are replicated, provided
however, that any event which occurred prior to the Refinancing and which would
have constituted a Credit Event will be deemed not to constitute a Credit Event
under the new Credit Derivatives Transaction, ie the slate is wiped clean.
(ii) Substitute Reference Obligation is one or more facilities/tranches under one or more
Successor Credit Agreements or no Substitute Reference Obligation.
If paragraph (i) above does not apply and follow Refinancing, at least 25 per cent of
the aggregate pre-Refinancing commitment outstanding of the Reference Obligations
is refinanced and there is one or more Qualifying Credit Agreements, and less than
25 per cent. of the aggregate pre-Refinancing commitments outstanding of the
Reference Obligations remain outstanding, each Qualifying Credit Agreement may
be a Successor Credit Agreement provided however that, the post-Refinancing
commitment in relation to the tranches/facilities under the Qualifying Credit
Agreement which are Secured is an amount equal to at least 25 per cent of each of
(1) the aggregate post-Refinancing commitments outstanding of the Qualifying
Credit Agreements and (2) the aggregate pre-Refinancing commitments outstanding
of the Reference Obligations and Specified Currency is satisfied in relation to one
or more tranches/facilities that are Secured, subject to the following: if following
Refinancing less than 100 per cent of the aggregate pre-Refinancing commitment
outstanding of the Reference Obligations is refinanced and no Successor Credit
Agreement has been determined in accordance with the provisions of the European
LCDS, there will be no Substitute Reference Obligation and the Credit Derivatives
Transaction will not be changed as a result of the Refinancing.
(iii) Substitute Reference Obligation is one or more facilities/tranches under one or more
Successor Credit Agreements/Original Credit Agreement.
If following Refinancing, at least 25 per cent of the aggregate pre-Refinancing
commitment outstanding of the Reference Obligations is refinanced and there is
one or more Qualifying Credit Agreements, and at least 25 per cent of the aggregate
pre-Refinancing commitments outstanding of the Reference Obligations remains
outstanding, each Qualifying Credit Agreement may be a Successor Credit
Agreement and the Reference Credit Agreement shall be an Original Credit
Agreement provided however that, the post-Refinancing commitment outstanding

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421

Credit Events and Restructuring

The Credit Events are still, Failure to Pay, Bankruptcy and Restructuring.
As for the Draft LCDS, either of the parties can trigger a Credit Event by delivery of
a Credit Event Notice and a Notice of Publicly Available Information which includes
extend Public Sources to Debtwire.com, Standard & Poors Leveraged Commentary
& Data (LCD) and Reuters Loan Pricing Corporation (Reuters LPC).
Both parties agree not to refuse to take receipt of a Credit Event Notice or a Notice of
Publicly Available Information which can include confidential information, and to take
reasonable steps to facilitate receipt of such information by eg entry into confidentiality
agreements on reasonable terms (LMA terms are deemed reasonable), setting up information barriers, providing contacts able to take receipt of such information (facilitation
of the receipt of confidential information equally applies to the Calculation Agent

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in relation to the tranches/facilities under the Qualifying Credit Agreement which are
Secured is an amount equal to at least 25 per cent of each of the (1) aggregate
post-Refinancing commitments outstanding of the Qualifying Credit Agreements
and (2) the aggregate pre-Refinancing commitments outstanding of the Reference
Obligations and Specified Currency is satisfied in relation to one or more tranches/
facilities that are Secured under such Qualifying Credit Agreement.
If, in the case of (ii) or (iii) above, more than one Successor Credit Agreement has
been identified, or one or more Successor Credit Agreements have been identified in
circumstances where the Original Credit Agreement will be retained, the relevant
Credit Derivative Transaction will be divided into the same number of new
Credit Derivatives Transactions as there are Successor Credit Agreements and the
Original Credit Agreement (if any), in each case with the relevant Successor Credit
Agreement and the Original Credit Agreement (if any) becoming/remaining the
Reference Credit Agreement and the respective Notional Amounts being determined
pursuant to percentage tests set out in Section 2.30(l) of the European LCDS.
Each tranche/facility of the Successor Credit Agreement/Original Credit Agreement
which is Secured and satisfies Specified Currency will be a Reference Obligation
which is a Designated Tranche for the New Credit Derivatives Transaction attributable to the Successor Credit Agreement/Original Credit Agreement. All other
terms of the original Credit Derivatives Transaction are replicated, provided
however, that any event which occurred prior to the Refinancing and which would
have constituted a Credit Event will be deemed not to constitute a Credit Event
under the new Credit Derivatives Transaction.
(iv) No Substitute Reference Obligation.
If following Refinancing, less than 25 per cent of the aggregate pre-Refinancing
commitment outstanding of the Reference Obligations is refinanced there will be no
Substitute Reference Obligation and the Credit Derivative Transaction will remain
unchanged following a Refinancing.

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Settlement
Physical Settlement

Physical Settlement applies to any Credit Derivative Transaction as a default

settlement method unless (i) the parties, in the Confirmation, expressly stipulate

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in connection with its duties under the European LCDS). In addition, they agree that if
they are not able to take receipt of such information, they are entitled to refuse receipt
of such non-public information but have to accept any determination based on such
information. Equally, if the Calculation Agent is not, for reasons of confidentiality,
able to disclose the basis of any determination, the parties may not (subject to certification by a Managing Director of the Calculation Agent) refuse to accept a determination
on the ground of non-disclosure of the basis therefore.
The other Condition to Settlement is a Notice of Physical Settlement (NOPS) which
stipulates the Notified Delivery Amount, ie either the total commitment (including both
the drawn and undrawn commitment) of a Deliverable Obligation which is a Revolver
or a Resettable Loan or the outstanding principal balance of any other Deliverable
Obligation. Once effective, the Buyer is not permitted to change the content of the NOPS
other than to correct errors and inconsistencies.
The Restructuring Credit Event has been retained in the European LCDS and
European documentation differs in this respect from the US LCDS. However, there are
significant differences between the terms of the Draft LCDS and the European LCDS.
Under the Draft LCDS, Restructuring was subject to Modified Restructuring Maturity
Limitation and Conditionally Transferable Obligation (Mod Mod R) and recognized
any release or discharge of collateral as a trigger event provided such release or discharge
materially diminished the remaining collateral taken as a whole. The European LCDS
is no longer subject to the constraints of Mod Mod R and whilst it still recognizes
diminished collateral as a trigger event, it does so only if such collateral is fully released or
discharged unless (i) immediately replaced, (ii) the proceeds thereof are used to repay
secured debt with a ranking or priority which is senior or pari passu to the Reference
Obligation or (iii) the proceeds are otherwise disposed of pursuant to the express terms
of the relevant credit agreement as at the later of its date and the Trade Date. In addition,
the subordination provision of Section 4.7(a)(iv) of the Credit Derivatives Definitions
have been amended to reflect subordination in terms of security and not payments.
The inter-play between Restructuring and Refinancing has the effect that only the
complete release of collateral will lead to a Credit Event and, in such circumstances
the Reference Obligation can be delivered pursuant to Physical Settlement even though it
no longer has the benefit of any security. Any release of collateral short of 100 per cent.
will now be subject to the provisions relating to Refinancing and substitution (provided
Continuity has not been expressly disapplied and release of collateral does not lead to
subordination pursuant to Section 4.7(a)(iv) of the Credit Derivatives Definitions).

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Cash Settlement

(i) Cash Settlement Only

The parties may elect Cash Settlement Only at the Trade Date, in which case all references
to Physical Settlement Amount and the Sellers Cash Settlement Election are disapplied and
Buyers Cash Settlement Election will kick in immediately following the NOPS Date.
If such election is not made by the parties (ie Physical Settlement applies) and delivery
of a Deliverable Obligation specified in the NOPS is not effected on or prior to the
75th Business Day following the Physical Settlement Date, the Seller and, from the

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Cash Settlement Only, (ii) either Seller or Buyer elects Cash Settlement in circumstances
where Physical Settlement has not occurred by the 75th Business Day following the
Physical Settlement Date or (c) Section 9.3 of the Credit Derivatives Definitions applies.
In addition, the European LCDS imposes, compared to the Draft LCDS, a more
realistic 145 Business Day cap on delivery retaining thus settlement efficiencies and
certainty. If a Deliverable Obligation specified in the NOPS has not been delivered to the
Seller or its order on or prior to the 145th Business Day after the Physical Settlement
Date, such 145th Business Day shall be deemed to be the Termination Date for the
Credit Derivatives Transaction for all obligations other than those in relation to which
a Final Price has been determined.
The European LCDS now hardwires market standard documentation relating to the
delivery of syndicated loans into the European LCDS. The documentation required in
connection with the delivery of Deliverable Obligations (excluding, for the avoidance
of doubt, Assets Entitlements (defined under the heading Deliverable Obligations)) is
(i) either the LMA Trade Confirmation (Distressed/Bank Debt) or the LMA Trade
Confirmation (Distressed/Claims) together with, in each case, the Standard Terms
and Conditions for Distressed Trade Transactions (Bank Debt/Claims) (the LMA
Conditions) each as published by the LMA as of the NOPS Date and as amended in the
Annex to the European LCDS and (ii) the transfer documentation stipulated in the
relevant credit agreement. The parties can mutually agree an alternative settlement
structure or other agreements. In addition, the Buyer must provide all relevant consents
and underlying guarantee documentation and, if the Confirmation stipulates Additional
Assets: Applicable all Additional Assets such as warrants and equity-linked instruments.
Failure to deliver the underlying guarantee documentation and/or, as applicable,
the Additional Assets will cause the Deliverable Obligations to be deemed not to have
been delivered. The Buyer also agrees to make all relevant LMA representations in the
form most appropriate to the Deliverable Obligations in accordance with the Standard
Documentation (Distressed) Users Guide most recently published by LMA.
It should be noted that if the parties wish to provide for participation as an alternative
to the transfer of Deliverable Obligations, they would have to mutually and separately
agree the terms of such documentation.

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85th Business Day following the Physical Settlement Date, the Buyer have a right to elect
Cash Settlement. Under the Draft LCDS, only the Seller had the right to elect Cash
Settlement.
(ii) Cash Settlement Election following Physical Settlement
(a) Sellers Cash Settlement Election

If the Seller has not made a Sellers Cash Settlement Election on or prior to the
85th Business Day following the Cash Settlement Date or has made such election
but no Final Price has been determined on or before the final day it could have
been determined pursuant to the provisions of Condition 7.7 of the Credit
Derivatives Definitions, the Buyer may, subject to the provisions of Partial Cash
Settlement due to Impossibility or Illegality, irrevocably elect Cash Settlement
(the Buyers Cash Settlement Election) at any time from but excluding the day
falling 85th Business Day after the Physical Settlement Date or, as applicable, the
final date on which the relevant Final Price could have been determined, as
applicable, to and including the date falling 115 Business Days after the Physical
Settlement Date to apply to all (but not some only) of the Deliverable
Obligations which have not been Delivered.
(iii) Partial Cash Settlement due to Impossibility or Illegality
The definition in Section 9.3 of the Credit Derivatives Definitions has been amended
to allow for a failure to obtain consent for Delivery of a Loan due to a freeze on the
settlement of such Loan or otherwise.
The Sellers Cash Settlement Election is not available, if on the 75th Business Day
following Physical Settlement, it is impossible/illegal for Buyer (and beyond its control)
to Deliver or impossible/illegal for Seller (and beyond its control) to accept Delivery

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The Seller may, subject to the provisions of Partial Cash Settlement due to
Impossibility or Illegality, for a period from and excluding the 75th Business
Day to and including the 85th Business Day, in each case following the Physical
Settlement Date, irrevocably elect Cash Settlement (the Sellers Cash Settlement
Election) to apply to all (but not some only) of the Deliverable Obligations
which have not been Delivered.
The Sellers Cash Settlement Election enables the Seller to buy the relevant
Deliverable Obligation at a Final Price determined in accordance with the
provisions of Section 7.7 of the Credit Derivatives Definitions subject however,
to Quotation Method: Offer and Valuation Method: Lowest provided it enters
into a binding arms length agreement. The Buyer can provide Quotations
pursuant to a Sellers Cash Settlement Election. If such Quotation is accepted,
the Cash Settlement Date will occur on the date on which the transaction
between the Seller and the Buyer is settled.
(b) Buyers Cash Settlement Election

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of any Deliverable Obligation specified in the NOPS. That 75th Business Day becomes
the first day on which Buyer can make a Buyers Cash Settlement Election.
Deliverable Obligations

4. Summary
The long-anticipated European LCDS has finally arrived though its launch coincided
with the summer break for financial markets and a volatile credit environment which
has seen bid/ask spreads in the loan market widening to such extent that it is currently
difficult to price credit derivatives. Given its long gestation, there is obviously pent-up
demand for this product. However, the initial reaction is one of caution, mainly over
continued concerns relating to liquidity. Generally, the European LCDS has achieved a
workable compromise between the needs of market participants, both on the hedging and
the trading side. The existence of a market-wide precedent has certainly settled
documentary uncertainties and dispelled some of the concerns, specifically over the issue
of cancellability. The advent of the new European LCDS documentation and its specific

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A Deliverable Obligation under the European LCDS is a Reference Obligation or a Senior

Loan only subject to satisfaction of the Deliverable Obligation Characteristic Specified
Currency which has been modified to include the currencies of Australia, New Zealand,
Norway, Denmark, Sweden and Singapore, in addition to the Standard Specified
Currencies usually referenced in the Credit Derivatives Definitions. If the Deliverable
Obligation is a Revolver or Resettable Loan, the definition of Specified Currency includes,
besides the currencies mentioned above, any Additional Currency specified in the related
Confirmation. The Deliverable Obligation Characteristic must be satisfied as of the NOPS
Date and not as of the Delivery Date (ie it is irrelevant if it is no longer satisfied as of the
Delivery Date). If this is not the case, the relevant Deliverable Obligation is deemed not
to have been specified in the NOPS.
If, after the NOPS Date but prior to delivery, a Deliverable Obligation specified in the
NOPS is redeemed and/or cancelled in whole or in part and the relevant holder thereof
receives cash, securities, rights and/or other assets (the Assets), Buyers right to deliver
the Deliverable Obligations is, to the extent they have been converted into Assets,
replaced by a right to deliver such Assets (the Asset Entitlement) pursuant to a Physical
Settlement. This is similar to the Draft LCDS with the difference that the Buyer no longer
has an option to select an alternative Deliverable Obligation. If, in the European LCDS,
the Seller is obliged to incur further obligations as a result of the receipt of any Asset,
it can elect not to take Delivery of such Asset(s) by notice to the Buyer, and Buyer is
deemed to have Delivered the Asset (ie its obligation to Deliver is extinguished) to Seller
on the day such notice is effective.
If Cash Settlement applies or is elected, the Asset Entitlements are valued in accordance
with the Cash Settlement provisions set out in the European LCDS.

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features will no doubt attract new participants into the market, particularly on the
much-needed sell-side. This should eventually see trading volumes for European LCDS
increase. With the base form of documentation for the market now in place the industry
as a whole can focus on related issues such as how to deal with information disclosure
in light of the limitations presented due to restrictions imposed by confidentiality
considerations.

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