Reference obligation characteristics

A key section of a credit default swap confirmation, the reference obligation characteristics list the features that an obligation must include to be eligible to trigger a credit event. This is a narrower description of the obligation than the terms used in the reference obligation category.

Confusingly, some of the reference obligation characteristics are defined by comparison with the reference obligation. This reflects the fact that the credit derivatives documentation uses the term reference obligation in two slightly different ways. One is the named reference obligation; the other is the broader category of obligations that can trigger a credit event.

This section of the confirmation defines the characteristics of the broader category of obligations capable of triggering a credit event. Among the reference obligation characteristics used in most credit default swaps are:

• not subordinated, which means the obligation capable of triggering a credit event must rank equal or higher in the reference entity’s capital structure than the reference obligation;
• specified currency, which indicates currencies in which the obligation can be denominated. This usually excludes bonds or loans issued in exotic currencies from triggering a credit event;
• not contingent, which means the obligation must not have payment of coupons or principal linked to an event or circumstance. This is usually taken to exclude convertible bonds from triggering a credit event, and also excludes exotic debt with coupons linked to, for example, oil prices.

See also deliverable obligation characteristics.