Binary credit default swap meaning

A credit default swap that pays a pre-agreed fixed cash amount if a specified credit event occurs during the transaction term, and pays nothing if it does not. Unlike a conventional CDS, the payout does not depend on recovery values or market prices of deliverable obligations. In market practice this is a descriptive term, broadly synonymous with a digital default swap, and is typically documented under an ISDA Master Agreement with the ISDA Credit Derivatives Definitions (2003 or 2014) and a confirmation specifying the credit events, observation period and fixed payout. Settlement is usually cash; delivery of obligations is not required. Key features include: binary (all-or-nothing) payoff; triggers tied to defined “Credit Events” (for example, bankruptcy, failure to pay or, if elected, restructuring); and reliance on ISDA Determinations Committee processes where applicable. It is commonly used to hedge jump-to-default risk or to express a view on default probability. There is no statutory or case-law definition in the UK or Ireland. Classification is as an OTC credit derivative under UK MiFID/MiFIR and EMIR (and their Irish/EU equivalents), with reporting, margin and, where relevant, clearing requirements. Usage is consistent across England & Wales, Scotland, Northern Ireland and Ireland.