Collateral Management

CHAPTER 41OTC Derivatives and Collateral – The Collateral Lifecycle – Throughout Lifetime of Trade – Post-Trade Execution Events – Credit Events

This chapter describes what credit events are, and how credit default swap contracts are impacted should a credit event occur. Should this post-trade execution event occur to a particular OTC derivative trade, there will be a fundamental impact to the ongoing collateral management of that trade.

Recommendation to Readers: as the subject of credit events relates directly to credit default swaps (CDS), it is recommended that readers that are not familiar with CDS should read Chapter 17 ‘OTC Derivatives and Collateral – Transaction Types – Credit Default Swaps’ prior to reading this chapter.

41.1 INTRODUCTION

Where a firm has a live/current OTC derivative trade, specifically a credit default swap (CDS), at any point during its lifetime that trade may be subject to a credit event.

The term ‘credit event’ is a generic label given to a qualifying event of default by, for example, a bond issuer who, by the terms and conditions of the bond issue, must pay interest (coupon) to investors on scheduled dates and (typically) at a predetermined rate of interest, and who should repay capital to investors no later than the bond’s maturity date. Should the bond issuer fail to make such payments, a credit event is deemed to have occurred, which ...