Downgrade - Credit event or not?

I saw 2 questions in schweser qbank - one says ISDA doesn’t not see it a downgrade as a credit event, whereas in the other it says “downgrading by a rating agency” is a credit event.

Anyone who can provide some clarity here please?

I will start with NO and then qualify my response more fully. For standard corporate credit default swaps, the answer is NO. That said, CDS is basically a contract between two parties so if two parties wanted to agree to a “pay as you go” concept or otherwise include a downgrade as a credit event, they could write that into it. My background is more in corporate CDS but I believe that CDS on ABS typically includes downgrades as a credit event.

So without seeing each full question, it is hard for me to say whether you have spotted an inconsistency in the two questions or that they are both technically accurate. I hope this helps. P.S. ISDA updated their credit definitions for corporate CDS in late 2014. I hope my knowledge is not now dated. :wink:

Downgrading is not a credit event unless of course the rating downgrade translates into a credit event, or since rating changes are supposedly lagging the market and hence in those rare cases where rating downgrades follows a potential credit event. Rating at best are opinion in themselves and not the actual manifestation of an event happening for good or bad.