Day One

Session 1:

• Course Introduction and Objectives

Session 2:

Market Background

• What is credit risk

• How & why banks manage credit exposures

• Why credit derivative markets have grown

Session 2:

Building Blocks of Credit Trading

This section introduces how banks traditionally trade credit spreads using swaps & bonds:

• Asset swap structures

• Pricing credit spreads/why credit spreads change

• What can go wrong

• Par/par structures

• Credit risk and returns

• Structuring an asset swap

• Funded nature of transaction

Session 3:

Credit Derivative Products

This section looks at the growth in credit derivatives and explains how the main CDs work:

• Market Statistic Total Return Swaps, (TRS)

• Credit Default Swap

Session 4:

How and why Banks use Credit Derivatives

This section explains some of the main uses for CDs:

• Synthetic credit portfolios- selling protection

• Hedging credit exposure from existing trades-buying protection

• Investment opportunities- arbitraging repo rates

• Funding- embedding credit risk in MTNs

• Tax arbitrage transactions

• Reducing capital use/repackaging capital intensive assets

• Managing credit risks on existing OTC products

Day Two

Session 1:

The Legal Framework

The section is intended as an introduction to the terms and documentation used for Credit Derivatives.

• ISDA Master Agreement and credit definitions

• Recognition that every ISDA is unique

• Jurisdiction of the parties involved

• Credit Events/Credit Event Definitions

• General definitions (entity, reference obligations etc.)

Session 2:

Confirmations:

• Purpose of standard confirmation

• Term sheet including, fixed and floating rate payer, reference entity & obligation, credit events, pricing sources, accrued interest, settlement method, deliverables

Session 3:

Problems with Credit Derivatives

This section is intended to explain why CDs need careful consideration before trading commences:

How and why CD transactions have gone wrong for financial institutions:

Session 4:

Selected case studies:

• Embedded credit derivatives

• Defining default

• reference entity difference

• Deliverable instruments

Session 5:

Checklist for starting credit derivatives

This section considers the appropriate questions that need to be considered before CD trades are entered into for the first time:

• Business case

• Board and ALCO approval

• Risk Management approval and sign off

• Internal Audit approval

• Accounting treatment

• Lead regulatory approval and sign off

• Appropriate limit structures

• Agreed legal documentation

• Counterparty credit risk approval

• Dealing Mandates

Course Close