STS Criterion 31. Final settlement credit protection payments

Description

Credit protection payments following the close out/Final Settlement at the final legal maturity of the credit protection agreement

Content

With regard to underlying exposures for which a credit event has occurred and the workout process has not been completed 2 years after the scheduled legal maturity or early unwinding of a transaction (the final reference date), a final credit protection payment should be made on the basis of the actual loss suffered by the originator and recorded by the originator in its Financial Statements at that time.

Following any termination of the credit protection by investors, the workout process should continue in respect of any outstanding credit events, which occurred prior to such termination in the same way as described in the first paragraph.

Rationale

As the full work out of losses can be a lengthy process, depending on the type of asset class/collateral under consideration as well as the characteristics of national judicial and insolvency regimes, It is important from the originator’s perspective to ensure a minimum degree of timeliness in credit protection payments. This not only increases certainty in the effectiveness of the credit protection arrangement from the originator’s perspective, but also increases legal certainty in terms of the final date of payments under the credit protection agreement from an investor’s perspective, contributing to a well-functioning market.