The short answer
After a credit event, a credit default swap settles by reference to the Reference Entity’s debt. The obligations that qualify for that settlement are the Deliverable Obligations. Under the 2014 ISDA Credit Derivatives Definitions, an obligation is a Deliverable Obligation when, in broad terms:
- it is an obligation of the Reference Entity, either directly or through a qualifying guarantee;
- it falls within the Deliverable Obligation Category the trade specifies;
- it has each Deliverable Obligation Characteristic the trade specifies; and
- it is not an Excluded Deliverable Obligation and still has a principal balance outstanding.
The Reference Obligation named for the trade is also treated as deliverable, unless it is excluded.
Category versus characteristics
The category says what kind of debt counts. The Definitions offer six: Payment, Borrowed Money, Reference Obligation Only, Bond, Loan, and Bond or Loan. Standard corporate trades generally use Bond or Loan, which admits bonds and loans but not, for example, trade payables or derivatives.
The characteristics are filters applied within that category. An obligation must have every one the trade lists. Those most often seen on standard corporate trades are:
- Not Subordinated: it does not rank below the Reference Obligation.
- Specified Currency: it is payable in a currency the trade specifies, by default the Standard Specified Currencies.
- Transferable: for obligations other than loans (loans are tested under Assignable Loan and Consent Required Loan instead), it can be transferred to institutional investors without contractual, statutory or regulatory restriction.
- Maximum Maturity: its remaining maturity does not exceed the stated limit, usually 30 years.
- Not Bearer: it is not a bearer instrument, unless interests in it are cleared through Euroclear, Clearstream or another recognised clearing system.
- Assignable Loan and Consent Required Loan: these apply to loans only, in place of Transferable. Where both are specified, a loan qualifies if it meets either one; it does not need to meet both.
The Definitions list further characteristics a trade can elect, such as Not Domestic Currency, Not Domestic Law, Listed and Not Domestic Issuance. The 2003 Definitions also had a Not Contingent characteristic; the 2014 Definitions handle contingent principal through the Outstanding Principal Balance instead. Mastermind still checks contingency explicitly and labels that check as its own, not an ISDA characteristic.
Physical settlement and auctions
Under physical settlement, the protection buyer delivers Deliverable Obligations with a face amount equal to the protected amount and the seller pays par for them. That is why deliverability matters: only qualifying obligations can be delivered.
In practice, standard trades are usually settled through an auction run under Auction Settlement Terms after the relevant Credit Derivatives Determinations Committee (DC) determines that a credit event occurred. The DC publishes a Final List of Deliverable Obligations for the auction. The auction produces a final price, and trades settle in cash by reference to it. The Final List still sets which obligations can be delivered in the auction’s physical settlement requests, so the same characteristics decide what is on it.
How a bond qualifies: a working checklist
- Issuer. Is the bond an obligation of the Reference Entity, or guaranteed by it? A different issuer, a successor or a guarantee needs its own analysis.
- Category. Is it a bond (or a loan, if the category admits loans)?
- Characteristics. Test each listed characteristic against the bond’s own terms: currency in the payment clause, ranking in the status clause, transfer provisions, the maturity date in the note form, and the form of the notes.
- Exclusions and balance. Is it an Excluded Deliverable Obligation for the trade, and is any principal still outstanding?
- Later documents. Check supplemental indentures, exchanges and amendments: a later document can change a term that decides a characteristic.
Two cautions. Another bond’s result is not proof for this one, even from the same issuer. And a missing term is a gap to resolve, not a pass.
In practice
Rite Aid’s 8.000% Senior Secured Notes due 2026
Rite Aid Corporation and certain subsidiaries filed voluntary Chapter 11 petitions on 15 October 2023. The question for a protection buyer was whether the 8.000% Senior Secured Notes due 2026 (ISIN US767754CL62) could be delivered.
Read against the 2020 indenture, the notes are issued by Rite Aid Corporation itself, payable in US dollars, mature on 15 November 2026, are described as senior secured, are issued in fully registered global form, and carry no clause requiring the issuer’s consent to a transfer. Every characteristic passes, so the notes are likely a Deliverable Obligation, with the clause behind each result cited on the case page.
Common questions
- Is a Deliverable Obligation the same as the Reference Obligation?
- No. The Reference Obligation is one named obligation that anchors the trade, in particular the seniority benchmark for the Not Subordinated test. Deliverable Obligations are every obligation of the Reference Entity that fits the Deliverable Obligation Category and has each Deliverable Obligation Characteristic, so several bonds and loans of the same entity can qualify.
- Who decides which bonds are deliverable in a CDS auction?
- When an auction is held, the relevant Credit Derivatives Determinations Committee publishes a Final List of Deliverable Obligations for it, after an initial list and a period for market participants to propose additions or challenges. The Final List governs the auction; your own analysis of a bond is a check against the terms, not a substitute for that list.
- Does the maturity, currency or seniority of a bond decide deliverability on its own?
- No. A bond must meet every characteristic the trade specifies. Passing Maximum Maturity or Specified Currency says nothing about Transferable or Not Subordinated; one failed characteristic is enough to exclude it.
This guide paraphrases CDSBench’s reading of the 2014 ISDA Credit Derivatives Definitions. The Definitions, the transaction’s confirmation and any Credit Derivatives Determinations Committee resolution govern. Decision support, not legal advice or a Credit Event determination.