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,...

Credit-Linked Notes: Overview of Structures, Documentation under Programmes, and Key Legal, Regulatory, Listing and Settlement Considerations

Published by a LexisNexis Banking & Finance expert

Practice notes

What is a credit linked note?

A credit linked note (CLN) is a funded credit derivative (see Practice Note: What are credit derivatives?). Unlike a credit default swap—essentially its unfunded counterpart—a CLN sits on the issuer’s balance sheet. Its value is driven by the credit risk of a third party, known as the ‘reference entity’. In its simplest form, the issuing entity (the protection buyer) issues a note; on the issue date the noteholder (or protection seller) pays the face amount and then receives an agreed return until either a credit event occurs in relation to the reference entity or the note reaches maturity. A CLN allows an investor to obtain the returns of a potentially risky reference entity without owning that entity directly.

Who issues and buys credit linked notes?

CLNs are generally issued by special purpose vehicles or financial institutions. They are typically bought by financially sophisticated investors—pension schemes, hedge funds, insurers and other financial institutions are active purchasers of credit linked notes. Financial institutions may then distribute the CLNs to their investors, in which...

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Web page updated on 21/05/2026

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