For the purpose of clarity, the various terms used in this exposure Guidance Note are explained hereunder. The definitions are largely based on the ISDA (International Swaps and Derivatives Association) Credit Derivatives Definitions 1999 as modified from time to time. The Working Group has suggested the use of the ISDA Credit Derivatives Definitions 1999 by the participants in the transactions. However, the participants may also use any other definitions as mutually agreed between them.

Credit Derivatives
are over the counter financial contracts. They are usually defined as "off-balance sheet financial instruments that permit one party to transfer credit risk of a reference asset, which it owns, to another party without actually selling the asset". It, therefore, "unbundles" credit risk from the credit instrument and trades it separately. Credit Linked Notes (CLNs), another form of credit derivative product, also achieves the same purpose, though CLNs are on-balance sheet products. Another way of describing credit derivative is that it is a financial contract outlining potential exchange of payments in which at least one leg of the cash flow is linked to the "performance" of a specified underlying credit sensitive asset.

Protection Seller
refers to the party that contracts to receive premiums or interest-related payments in return for assuming the credit risk on an asset or group of assets from the Protection Buyer. The Protection Seller is also known in the market as the Credit Risk Buyer or Guarantor.

Protection Buyer
refers to the party that contracts to transfer the credit risk on an asset or group of assets to the Protection Seller. The Protection Buyer is also known in the market as the Credit Risk Seller or Beneficiary.

Premium
is the fee the protection buyer pays to the protection seller as in case of insurance business.

Credit Event
is defined as a scenario or condition agreed between the contracting parties that will trigger the credit event payment from the Protection Seller to the Protection Buyer. Credit events usually include bankruptcy, insolvency, merger, cross acceleration, cross default, failure to pay, repudiation, and restructuring, delinquency, price decline or rating downgrade of the underlying asset / issuer.

Credit Event Payment or Settlement
is the amount that is paid following a credit event. This is defined in the contract, and is normally one of three types:

1. Physical delivery: payment of par or other specified value in exchange for physical delivery of the Reference Asset (or a variety of assets) of the Reference Entity as allowed under some contracts.

2. Cash settlement: payment of par less recovery value. The Reference Asset will normally retain some value after a credit event has triggered settlement of the contract. The recovery value is normally determined at a date up to three months after the credit event, by a dealer poll or auction.

3. Fixed Amount: Payment of a fixed amount.

Reference Asset
refers to the asset to which payments under the credit derivative contract are referenced or linked. It is also called reference obligation.

Underlying Asset
refers to the asset on which credit risk protection is bought by the Protection Buyer. It could be a bank loan, corporate bond / debenture, trade receivable, emerging market debt, municipal debt, etc. It could also be a portfolio of credit products. This is usually also the Reference Asset.

Reference Entity
is the entity upon whose credit the contract is based.

Deliverable Obligation>
defines what assets are eligible for delivery as settlement in a physical delivery contract. It usually includes Reference Obligation but will often be broader to include other obligations.

Obligations
define what assets may trigger a Credit Event. These are usually same as the underlying asset.

Sponsor
denotes the entity that places the portfolio in a Special Purpose Vehicle for issue of notes.

Senior Debt
means that portion of funding in case of structuring of a Collateralized Debt Issue (CDO), which has the lowest risk weight, or the highest rated debt.

Mezzanine Debt
refers to that portion of funding in case of structuring of a Collateralized Debt Issue (CDO), which has debt in ascending order of risk weights, or in descending order of ratings.

Equity
refers to the balance funding in case of structuring of a Collateralized Debt Issue (CDO), which has the highest risk weight, or the lowest rated debt.