What are credit derivatives?
What are credit derivatives?

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

  • What are credit derivatives?
  • What is a credit derivative?
  • Funded or unfunded credit derivatives
  • Types of credit derivatives
  • Rationale for using credit derivatives
  • Credit derivative documentation
  • What is a credit event?
  • Settlement of credit derivatives
  • Clearing of credit derivatives

BREXIT: As of 31 January 2020, the UK is no longer an EU Member State, but has entered an implementation period during which it continues to be treated by the EU as a Member State for many purposes. As a third country, the UK can no longer participate in the EU’s political institutions, agencies, offices, bodies and governance structures (except to the limited extent agreed), but the UK must continue to adhere to its obligations under EU law (including EU treaties, legislation, principles and international agreements) and submit to the continuing jurisdiction of the Court of Justice of the European Union in accordance with the transitional arrangements in Part 4 of the Withdrawal Agreement. For further reading, see: Brexit—introduction to the Withdrawal Agreement. This has an impact on this Practice Note. For guidance, see Practice Note: Brexit—impact on finance transactions—Key issues for derivatives transactions and Brexit—impact on finance transactions—Derivatives and debt capital markets transactions—key SIs.

What is a credit derivative?

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 (eg unguaranteed) obligations. The primary purpose of a credit derivative is to isolate the credit risk of that reference