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Credit event

A defined trigger such as bankruptcy, failure to pay or restructuring that causes a credit default swap to settle.

The definitions are standardised so that a contract written in London settles the same way as one written in New York. A determinations committee of dealers and buy-side firms votes on whether an event has occurred, which removes most of the bilateral argument.

Restructuring is the contentious one, because a debt exchange that leaves creditors worse off may or may not qualify depending on which flavour of contract was traded. This is why identical-looking CDS on the same name can be worth different amounts.

Example: a determinations committee rules a failure to pay after a missed coupon and a 30-day grace period. An auction two weeks later sets the recovery at 32, so protection buyers receive 68 per 100 of notional.

Related: credit-default-swap, default, recovery-rate, seniority, covenant

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

An equity curve and its drawdownAn account balance rising over a year, falling from a peak to a trough, then climbing back to the old peak.ACCOUNT EQUITY$20k$12k$8k024681012TIME (MONTHS)PEAK $16,000TROUGH $12,000DRAWDOWN−25%RECOVERY
Equity curve and drawdown. An account balance plotted month by month. The fall from the $16,000 peak to the $12,000 trough is a 25% drawdown, and the shaded area lasts until the balance climbs back to the old peak.

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