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ARTICLE · 18 OCTOBER 2005

Recent U.S. Developments in the Financial Products Area*

Orrick
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Perhaps the most innovative financial product of the 1990s was the credit derivative contract. Credit derivative contracts allow parties to transfer and speculate on the creditworthiness of a taxpayer. The contracts usually take the form of a credit derivative swap ("CDS") using an ISDA master agreement.

United StatesTax
Peter Connors
Peter Connors
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The past year has borne witness to a number of important developments in the financial products area. This article reviews four of them.

1. Credit Derivatives

Perhaps the most innovative financial product of the 1990s was the credit derivative contract. Credit derivative contracts allow parties to transfer and speculate on the creditworthiness of a taxpayer. The contracts usually take the form of a credit derivative swap ("CDS") using an ISDA master agreement.

Under a typical CDS, (a) a protection buyer agrees to pay a protection seller1 either (1) a periodic amount that is a fixed number (or less frequently, a variable number) of basis points applied to a notional principal amount over the term of the CDS, or (2) less frequently, an upfront premium, and (b) the protection seller agrees to pay the protection buyer the difference between the par value of a reference security of the same notional principal amount and its fair market value (or in some cases, a predetermined fixed

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