Credit derivatives

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This overview is a guide to the Banking & Finance content within the Credit derivatives subtopic, with links to appropriate materials.

What are credit derivatives?

A credit derivative is a bilateral transaction which takes its underlying value from the credit risk of a third party, known as the 'reference entity'. The reference entity issues reference obligations, which refer to its specific underlying direct and indirect obligations. The primary purpose of a credit derivative is to isolate the credit risk of that reference entity from all other risks. This reference entity can be a corporate, sovereign, municipality or a similar organisation and does not need to be a party to, or even aware of, the transaction.

The party assuming the credit risk of the reference entity is known as the 'protection seller' and the party acquiring the credit protection is known as the 'protection buyer'. If a Credit Event (as defined in the 2014 ISDA Credit Derivative Definitions) occurs on the reference entity, the payment obligations under the transaction will be triggered and the transaction settled.

Credit derivatives are entered into for any of the following reasons:

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Latest Banking & Finance News

The Supreme Court tweaks Etridge (Waller Edwards v One Savings Bank plc)

Property Disputes analysis: English property law periodically produces epoch-making decisions of the highest court. In years to come, Waller Edwards v One Savings Bank plc may well become such a decision. It enjoys the respectable jurisprudential lineage of three famous House of Lords’ decisions: Barclays Bank v O’Brien, CIBC Mortgages v Pitt, and Royal Bank of Scotland v Etridge, but it also applies established principles in a novel way. Written by Marc Beaumont, Windsor Chambers.

ESMA updates Q&As on Prospectus Regulation, MiCA and UCITS Directive

The European Securities and Markets Authority (ESMA) has published updated questions and answers (Q&As) on regulatory implementation relating to the Prospectus Regulation (EU) 2017/1129, the Markets in Cryptoassets Regulation (Regulation (EU) 2023/1114) (MiCA) and the Undertakings for Collective Investment in Transferable Securities Directive (Directive 2009/65/EC) (UCITS). The Prospectus Regulation Q&A impacted is ‘Historical financial information’. The impacted MiCA Q&As are: (1) ‘Custody agreements in the exercise of rights attached to cryptoassets’; (2) ‘Commingling clients’ crypto-assets with crypto-assets from other entities of the group when acting as custodian’; and (3) ‘Shared order book model’. The impacted UCITS Directive Q&A is ‘Updates of notification letters for the cross-border marketing of UCITS’.

ISDA announces July 2025 launch of new derivatives notices platform

The International Swaps and Derivatives Association (ISDA) has announced the launch its new Notices Hub platform on 15 July 2025, addressing critical challenges in delivering derivatives termination notices. The platform aims to replace physical delivery requirements in ISDA Master Agreements, solving problems that emerged during pandemic lockdowns and the Ukraine invasion when office closures and safety concerns made physical delivery difficult. The platform will feature secure online delivery, automatic alerts to designated recipients, and the ability to update physical address details across all agreements through a single entry. The service will be free for buy-side firms, with dealers receiving a two-year discount for early adoption. ISDA has opened a free pre-adherence process for firms to sign the protocol updating their agreements. The platform will also allow for the exchange of waivers, such as those for net asset threshold events, bringing structure to what has traditionally been an ad hoc process.

LSE publishes first round of ISM Rulebook amendments for 2025

The London Stock Exchange (LSE) has published Market Notice N06/25, confirming amendments to the International Securities Market (ISM) Rulebook, following its initial consultation (Notice N03/25 from 29 May 2025). These changes, which take effect on 30 June 2025, will clarify existing requirements for expert statements and extend guaranteed bond structure provisions to sukuk instruments (Islamic finance). This consultation marks the first of two planned for 2025, with a second consultation expected to discuss alignment with the Financial Conduct Authority’s new Prospectus Rules. Market participants have responded positively to these technical clarifications. The updated ISM Rulebook will be available on the LSE website from 30 June 2025.

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