What Constitutes a “Credit Event” That Would Trigger a CDS Payout?
A credit event is a specific, predefined trigger in a CDS contract that prompts a payout from the protection seller to the buyer. While contracts can vary, the most common credit events are bankruptcy of the reference entity, failure to pay on its obligations, and debt restructuring that harms the creditor.
The International Swaps and Derivatives Association (ISDA) provides standardized definitions for these events to ensure clarity and consistency in the market. The occurrence of a credit event must be publicly verifiable.
Glossar
Credit Event
Event ⎊ In cryptocurrency derivatives, a Credit Event signifies a pre-defined occurrence triggering accelerated settlement or modification of a contract, mirroring concepts from traditional credit default swaps.
Payout
Delivery ⎊ The final payout represents the culmination of the option contract, involving the transfer of the underlying asset or a cash equivalent from the losing party to the winning party upon exercise or expiration.
CDS
Structure ⎊ Credit Default Swaps, within cryptocurrency derivatives, function as a mechanism to transfer credit risk associated with a specified reference entity or asset.
Credit Events
Default ⎊ Credit Events are predefined occurrences, typically standardized by ISDA, that signal a material deterioration in the creditworthiness of a reference entity, triggering the settlement of credit derivative contracts.