Manufactured credit event

Definition

Manufactured credit event occurs when a buyer of the CDS protection, sometimes together with the entity referenced by the CDS, forces the entity to default on the CDS-insured debt in order to collect the CDS pay out from the CDS seller.

Context

Manufactured credit events may in certain circumstances constitute market abuse by the involved parties – both the CDS counterparty and the firm referenced in the CDS. This behaviour can severely harm confidence and trust in the credit derivatives market, including single-name CDS and indices.

Surveillance

Effective implementation of surveillance alerts for manufacutred credit events requires capturing the following data:

  • CDS position data

  • communications data

Regulatory source

FCA Market Watch 58