Credit default swap (CDS) meaning

ARCHIVED : This Practice Note has been archived and is no longer maintained. STOP PRESS: The Short Selling Regulations 2025 were made and published on 13 January 2025, together with an explanatory memorandum. These regulations replace the assimilated UK Short Selling Regulation and introduce a new legislative framework governing short selling in the UK, defining designated activities and empowering the Financial Conduct Authority (FCA) to set rules for those activities, alongside powers to act in exceptional circumstances. Certain parts commenced on 14 January 2025, with the remainder starting on the date the revocation of the UK Short Selling Regulation takes effect under FSMA 2023. The UK’s new regime removes obligations on investors when entering short positions in sovereign debt or sovereign credit default swaps (CDS) and the linked reporting requirements, while keeping sovereign debt and sovereign CDS within the FCA’s emergency intervention powers on short selling...

Step-by-step guide A protection buyer (party A) and a protection seller (party B) execute an ISDA Master Agreement, the accompanying Schedule, and a confirmation document with one another to document a CDS contract. The contract explicitly names a specific reference entity. Within the confirmation, both parties state that, if a credit event occurs for that reference entity, the deal will be cash settled. Party A undertakes to pay party B a fixed fee or premium—this may...

What does this Practice Note cover? This Practice Note sets out how the three settlement approaches—auction settlement, cash settlement and physical settlement—work within a credit derivative transaction. It also outlines a fallback settlement mechanism and explains why it might be adopted and the circumstances in which it is used in practice. What are the settlement methods in credit derivative transactions? After a credit derivative transaction has been triggered, the parties will wish to complete settlement so that each receives any sums due to it. The parties may choose which settlement method will govern that transaction from the following options: auction settlement cash settlement, or physical settlement The 2014 ISDA Credit Derivative Definitions (the 2014 Definitions) provide for settlement once the conditions to settlement have been met. For additional detail, see Practice Note: Triggering and settling credit derivatives. Since 2009, auction settlement has become the favoured settlement route, following its insertion (or ‘hard-wired’ adoption) into the 2003 ISDA Credit Derivative...