OTC Derivatives and Collateral – The Collateral Lifecycle – Throughout Lifetime of Trade – Post‐Trade Execution Events – Credit Events

This chapter describes what credit events are, and how credit default swap contracts are impacted should a credit event occur. Where a firm has a live/current over‐the‐counter derivative trade, specifically a credit default swap (CDS), at any point during its lifetime that trade may be subject to a credit event. The term ‘credit event’ is a generic label given to a qualifying event of default by, for example, a bond issuer who, by the terms and conditions of the bond issue, must pay interest to investors on scheduled dates and at a predetermined rate of interest, and who should repay capital to investors no later than the bond's maturity date. When a CDS trade is executed, the particular events that will qualify as credit events are agreed between the two trading parties; amongst others, these typically include the bond issuer's: bankruptcy, failure to pay, and debt restructuring.