Credit Event Definitions and Succession Events

A credit default swap only pays out when a credit event — an ISDA-defined trigger, chiefly bankruptcy, failure to pay, or restructuring — actually occurs, not simply when an issuer's bonds fall in price or its rating gets cut. This precision matters because CDS is a contract, not an opinion: both sides need an unambiguous, legally defined trigger they can point to, decided in practice by ISDA's Credit Derivatives Determinations Committees rather than left to each counterparty's own judgment.

A succession event is a separate but related mechanism: when the company a CDS references undergoes a corporate change — a merger, spin-off, or demerger — the original reference entity may cease to exist in its old form, and the CDS contract needs to be reassigned to whichever successor entity actually took on the relevant debt. ISDA's determinations committee decides this too, based on which successor absorbed the largest share of the original entity's relevant obligations.

Worked example. Company X has $10 billion of CDS referencing its debt. It spins off a division into new Company Y, splitting its bond obligations roughly 60/40 between X and Y. Rather than leaving all outstanding CDS contracts referencing only the original Company X, ISDA's determinations committee designates both X and Y as successors, and existing CDS positions are split proportionally between the two — each successor now has its own CDS market, and holders of the original contract end up holding a blend of exposure to both.

Without a formal succession-event process, a corporate restructuring could leave CDS holders protected against an entity that, legally, barely exists anymore — exactly the ambiguity the process exists to prevent.