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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