Triggering and settling credit derivatives
Triggering and settling credit derivatives

The following Banking & Finance guidance note provides comprehensive and up to date legal information covering:

  • Triggering and settling credit derivatives
  • How is a credit event determined?
  • How is a credit event triggered?
  • What documentation should be sent on the occurrence of a credit event?
  • Settlement procedures

How is a credit event determined?

Article 4 of the 2014 ISDA Credit Derivative Definitions (the 2014 Definitions) sets out the types of credit event that can occur. However, the occurrence of one of these credit events is not sufficient to trigger performance under a credit derivative—certain formalities must also be complied with. See Practice Notes: Credit derivatives—credit events and Restructuring credit event.

Since 2009, the majority of credit events are determined by the ISDA Credit Derivatives Determinations Committee (the DC). Any eligible market participant can submit a credit event resolution request to ISDA with respect to an affected reference entity under the 2014 Definitions. This means that if you think that a credit event has occurred on a reference entity that is referenced in a credit derivative transaction that a party has entered, that party can ask the DC to confirm publicly that a credit event has occurred. When parties agree to use the 2014 Definitions for their transactions, unless specifically carved out, they agree to be bound by any DC determinations. By doing this, the uncertainty surrounding the occurrence of a credit event is removed. DCs also determine whether succession events have occurred and the identity of any successor (see Practice Note: Credit derivatives—successors).

Regional DCs have been formed for each of the following five regions: