Jurisdiction(s):
United Kingdom

Key definition

Derivatives definition

What does Derivatives mean? Derivatives are contracts used to transfer or manage risk, whose value is determined by an underlying asset, interest rate, currency, index, commodity, security or credit event. Common types include futures, options, swaps (interest rate and currency), forwards and credit derivatives (such as credit default swaps), traded on exchanges or over the counter. Legally, derivatives create payment or delivery obligations calculated by reference to the underlying. They are typically documented under an ISDA Master Agreement with a Credit Support Annex for collateral, and depend on close-out netting upon default. Key issues include counterparty capacity and authority, governing law and jurisdiction,...

CDS settlement under the 2014 ISDA Definitions: DC auction process, cash valuation, physical delivery, fallbacks, restructuring buckets, asset package delivery and treatment of locked-up debt

Published by a LexisNexis Banking & Finance expert

Practice notes

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 Definitions (the forerunner to the 2014 Definitions). Auction settlement promotes greater standardisation across the credit default swap market, ensuring contracts referencing the same entity are fungible and capable of central clearing. In October 2017, the International Organisation of securities Commission (iosco)...

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Web page updated on 21/05/2026

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