This article provides a comprehensive overview of the credit event lifecycle, from event determination to auction and settlement. We examine how credit events propagate through CDS index contracts, analyse the empirical P&L impact across recent events, and highlight the operational challenges that arise during the transition between index versions.
Throughout, we illustrate how Clarion, our portfolio management software, supports Coremont clients at each stage of this process – combining robust analytics, automated workflows, and reliable infrastructure to ensure accurate pricing, seamless position management, and P&L continuity.
What is a credit event?
A credit event occurs when a reference entity suffers a contractually defined failure—typically bankruptcy, failure to pay, or restructuring—as defined under the ISDA Credit Derivatives Definitions. These events can trigger the settlement of protections provided by credit derivatives such as single‑name CDS, CDS indices, and index tranches.
Upon the occurrence of a credit event, single-name CDS contracts transition from a stream of premium payments to a protection payout and the contract terminates.
For index CDS, the defaulted name is removed from the current version of the index and separated into a protection payout. A new index version starts trading with reduced notional.
What is the typical timeline of a credit event?
When a credit event occurs on a CDS reference entity, the market follows a highly standardized sequence administered by the ISDA Determinations Committee (DC):
1. Credit Event Occurrence: A credit event (e.g., bankruptcy, failure to pay, restructuring) must be publicly verifiable using ISDA‑defined “Publicly Available Information”.
2. Submission of a “Credit Event Request” to ISDA DC: Any market participant may submit a request asking the DC to rule whether a credit event has occurred.
3. DC Vote on Whether a Credit Event Occurred: The DC votes, typically by simple majority, to decide whether a credit event has occurred (except for some restructuring cases). If yes, the event determination date is confirmed by the DC. In rare cases the DC may vote that no credit event has occurred, in which case the CDS contracts continue to trade normally and no auction is triggered.
4. Determination of Deliverable Obligations (DOs) and Auction Terms: DC constructs the list of bonds eligible for delivery into the CDS auction and confirms the auction date as well as the auction terms.
5. On Auction Date: The credit event auction is conducted, participants who have asked for physical settlement of one of the DOs place their bids and the process determines the prices of the specific pool of DOs. The final auction price is the representative price of the pool and it determines the final recovery value used for cash settlement of the CDS contracts. The majority of CDS holders usually opt for cash settlement. These participants do not submit bids or offers during the auction, but wait for the auction result.
6. Settlement of CDS Contracts: On settlement date (Auction Date + 3 days), protection buyers will receive the protection payout. The settlement can be physical – one of the DOs is delivered by the protection buyer to the seller versus par – or directly cash-settled.
The figure below summarizes the event lifecycle timeline.
How frequent are credit events?
Since June 2005, all CDS credit events triggering auction settlement have been publicly recorded by Creditex/Markit (now S&P Global) via the Credit Event Auction process. The official archive lists all auctions year‑by‑year, from 2005 to 2026, including every corporate or sovereign credit event that resulted in a CDS auction [link]. The figure below shows the number of credit event auctions for the period 2005 to 2026. There was an average of 9 auctions per year with a peak during the subprime crisis in 2009.
Recent events in 2025 include Altice France (Bankruptcy, 28th May 2025), NFE Financing (Failure To Pay, 20th November 2025) or Ardapac Packaging Financing (Restructuring, 7th October 2025).
Impact on CDS Index Trading
Before examining the empirical P&L impact of credit events, it is important to understand how a credit event propagates through CDS index contracts — and why, under correct marking, index trades P&L should be continuous across the auction date.
How credit events affect CDS index trading?
A credit index represents a portfolio of single‑name CDS contracts, constructed according to predefined rules, and allows market participants to buy or sell protection on the aggregate credit risk of that portfolio through a single, liquid instrument. CDX IG and HY (North America) and iTraxx Main and Xover (Europe) are the most traded CDS Indices. Index new Series are issued every 6 months.
A credit event on one of the index constituent triggers protection payout on CDS index contracts. The index splits into three components:
1. A new version of the index, with reduced notional
2. The defaulted component as a separate defaulted‑claim position
3. An accrual rebate, to compensate the protection buyer (resp. seller) for overpayment (resp. underpayment) of protection
The split usually becomes effective the day following the auction date, once the final recovery has been determined. That is typically the case for most credit events (Bankruptcy and Failure To Pay). When the event is a restructuring, the new index version will start trading as soon as the event is determined (e.g. Ardapac recently). This situation is rarer and we won’t be covering restructuring events in the rest of the article.
The new index version will continue trading till maturity or till another credit event affects the version.
Equivalence Between Current Version and New Version
Between the credit event date and the auction date, the current version of the index still trades in the market. However, its economic value is exactly decomposable into:
Vcurrent = Vnew + Vclaim + Vrebate (1)
where:
- Vcurrent is the Present Value (PV) of the index including the defaulted name
- Vnew is the PV of the index excluding the defaulted name
- Vclaim is the PV of the defaulted name valued at expected recovery Rexpected
- Vrebate is the accrual rebate
The relationship (1) is enforced by the definition of the CDS index contract, and by the ISDA auction framework, which defines how recovery is set and index factor is adjusted after each credit event. It can be used to imply the new version of the index from the current version of the index, before and up to the auction date.
P&L Impact on Credit Event Auction
The equivalence in equation (1) ensures that, if marked correctly, the credit index P&L should be smooth across the credit auction date, unless the auctioned recovery diverges from the expected recovery. There should be no P&L jump on auction day except for:
1. Unexpected Recovery:
The difference between the auctioned recovery and the market’s recovery expectation feeds directly into the index P&L:
ΔP&L = w (Rauction − Rexpected)
with w the weight of the defaulted name in the index. As we will show in Part 2 of the article, the market generally prices the CDS recovery with reasonable accuracy before the auction date, but surprises can and do occur.
2. Normal market moves in the surviving names:
On the day following the auction date, the spread of the new index version will tick as per normal trading conditions and hence will contribute to the P&L.
3. Operational slippage:
The event settlement cashflows – the default claim and the accrual rebate – drop from the index market value and the relevant cashflows must be booked in the book of record. Delays or errors in this process can create apparent P&L discontinuities.
Case Study: NFE Financing LLC
On the 5th December 2025, a credit event was confirmed by the DC on NFE Financing LLC, one of the constituents of the on-the-run CDX HY S45 index (100 equally weighted constituents, 5% contractual coupon to buy protection).
The event determination date was set to the 21st November 2025 and the auction took place on the 14th January 2026, with final price auctioned at 26.625% – equivalent to a 73.375% loss.
Index trading during the event window
The HY index including the defaulted name continued trading till the auction date with an index factor 𝑓1 = 1, and as a result 30 days of accrued were overpaid for protection on the defaulted name, from the event determination date to the last coupon date, the 22nd December 2025.
CDX HY quotes in price, with quoted price P being related to the point upfront UPF using the formula:
P = 100 − UPF /𝑓
whith 𝑓 the index factor. The equivalence relationship can be rewritten as:
UPF1 = UPF2 + (100 − R)w + 100A w (2)
where:
- UPF1 is the PV of version 1 of the index, constituted of 100 names (𝑓1 = 1)
- UPF2 is the PV of version 2 of the index, constituted of 99 names (𝑓2 = 0.99)
- w = 1/100 is the weight of NFE in the index
- (100 − R)w = 0.73375 is the PV of the defaulted name valued at expected recovery R = 26.625
- A = 5% × 30 / 360 = 0.4167% is the accrual rebate.
The equivalence (2) can be expressed as a difference of Price:
P2 − P1 = (P1 − R + A) w / 𝑓2 = (P1 − R + A) / 99
On the 14th of January 2026, HY S45v1 was trading around 107.678, and the equivalence implies that HY S45v2 was trading 82.2 cents higher, around 108.5, which was roughly the level the new version started to trade on the 15th January.
The price difference can be translated to a quoted spread difference using the CDS ISDA model, in spread HY S45 v2 was trading 18bps tighter than HY S45 v1.
