Credit Event

From Open Risk Manual

Definition

Credit Event denotes any well-defined (both from a time-of-occurence perspective and from a legal perspective) situation where a legal entity (for example a physical person or a commercial / public entity) defaults on a significant financial contract.

A credit event is the concrete manifestation (realization) of Credit Risk.

Usage

Depending on the type of the contract, the entities involved, the business, regulatory and accounting context, a credit event may be more or less formal and may have different implications.

Credit Derivatives

The term came to prominence with the advent of Credit Derivative instruments. When a bilateral derivatives contract follows the ISDA template there is recognition of the following credit events:

  • Bankruptcy
  • Obligation Acceleration
  • Obligation Default
  • Failure to Pay
  • Repudiation/Moratorium
  • Restructuring

Issues and Challenges

  • Whether a credit event has actually occurred is occasionally difficult to establish, for example when there is a complex nexus of interconnected parties and contractual relationships

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