Fpml Nth to Default CDS Basket Proposal

FpML CDS Basket Proposal

Andrew P Parry

JP Morgan

Summary

This proposal sets out a way to support CDS Baskets that is backward compatible with FpML 4, and makes extensive use of existing types

Changes

1. Add Basket Reference Information

This is a new type which is analogous to existing types Reference Information and Index Reference Information

<documentation xml:lang = "en">The name of the basket expressed as a free format string. FpML does not define usage rules for this element

</documentation>

</annotation>

</element>

<documentation xml:lang = "en">A CDS basket identifier</documentation>

</annotation>

</element>

</sequence>

<documentation xml:lang = "en">A CDS basket identifier</documentation>

</annotation>

</element>

</sequence>

</choice>

<documentation xml:lang = "en">N th reference obligation to default triggers payout</documentation>

</annotation>

</element>

<documentation xml:lang = "en">This element contains all the terms relevant to defining the reference entity and reference obligation(s).</documentation>

</annotation>

</element>

</sequence>

</complexType>

2. Add Reference Pool

This is a new type which contains Reference Pool Items

<xsd:complexType name="ReferencePool">

<xsd:annotation>

<xsd:documentation xml:lang="en">This type contains all the reference pool items to define the reference entity and reference obligation(s) in the basket</xsd:documentation>

</xsd:annotation>

<xsd:sequence>

<xsd:element name="referencePoolItem" type="ReferencePoolItem" maxOccurs="unbounded"/>

</xsd:sequence>

</xsd:complexType>

3. Amend Reference Pool Item

Amend this type to use Reference Information instead of Reference Pair

Both Reference Pool Item and Reference Pair are not presently used by any element within FpML. Reference Pair appears to be a synonym of Reference Information. Please see Appendix A.

<xsd:complexType name="ReferencePoolItem">

<xsd:annotation>

<xsd:documentation xml:lang="en">This type contains all the constituent weight and reference information</xsd:documentation>

</xsd:annotation>

<xsd:sequence>

<xsd:element name="constituentWeight" type="ConstituentWeight"/>

<xsd:element name="referencePair" type="ReferencePair"/>

</xsd:sequence>

</xsd:complexType>

4. Amend General Terms

Allow the choice of Basket Reference Information in addition to the existing choice of Reference Information or Index Reference Information

Add an optional substitution child element. Presence of this element indicates that substitution is applicable

Example

Please see the provided example “cds-basket.xml”

All existing FpML-4-2-WD Credit Derivatives examples have been included to demonstrate the backward compatibility of this proposal

Appendix A

ReferenceInformation vs ReferencePair

ReferencePair appears to be a synonym for ReferenceInformation

Child element / ReferenceInformation / ReferencePair
referenceEntity / Yes / Yes
referenceObligation / Yes / Yes
noReferenceObligation / Yes / Yes
unknownReferenceObligation / Yes / No
allGuarantees / Yes / No
referencePrice / Yes / No
entityType / No / Yes

Appendix B

Alternate approaches

1. Version 1 of this Proposal

Amended ReferenceInformation type with an optional constituentWeight child element. This approach was not selected due to the preference to leave the type entirely unaltered

2. Amend BasketConstituent

This type contains a reference to underlying asset, which means that any type appearing in an instance document using BasketConstituent must extend UnderlyingAsset

It would be possible for ReferenceInformation to extend UnderlyingAsset, and so use Basket instead of ReferencePool proposed above

This approach would not be a good fit for the reference entity and reference obligation pair requirement of CDS, since it would involve deriving from a base class whose intention is to represent solely the asset obligation