Mod R and Mod Mod R: What These Terms Mean in Credit Derivatives Transactions
The 2014 ISDA® Credit Derivatives Definitions (‘2014 Definitions’) are a key component of any credit derivative transaction done between parties. The definitions contain many optional provisions, which need to be elected or disapplied in any confirmation. Two such provisions are the Mod R or Mod Mod R clauses.
These provisions aim to reduce the moral hazard of receiving the ‘cheapest to deliver’ assets when parties are closing out and settling transactions following a restructuring credit event. The purchaser of protection may be inclined to deliver very cheap, long-dated defaulted bonds to the seller of protection when physically settling a credit derivative transaction. By electing with Mod R or Mod Mod R provisions to apply, the buyer of protection will be limited from doing this.
Mod R provisions apply mainly to obligations in the US markets. These provisions ensure that the maturity of obligations is limited and that only more liquid obligations can be delivered in settlement or closing out of a credit event.
Mod Mod R provisions apply similar maturity and liquidity limitations to obligations but these are more common for non-US obligations. The 2014 Definitions aim to reduce the number of deliverable obligations for settling and closing out transactions and have therefore grouped deliverable asset (or obligation) maturities into four baskets based on the quarterly roll dates following a set time after the restructuring credit event.
For more information on other changes which have been made to the 2014 ISDA® Credit Derivatives Definitions, register for our upcoming course:
Thursday 03 August 2017