Rating Triggers and Credit Migrations

Modeling, managing and mitigating counterparty risk is a crucial task for all financial institutions. One of the most popular mitigation techniques used by market participants is the inclusion of additional termination events (ATE) in OTC transactions. As defined in Section 5(b)(vi) of International Swaps and Derivatives Association (2002), ATEs allow institutions to terminate and close out the derivatives transactions with a counterparty if a termination event occurs. Here, we will consider a particular and in fact the most common termination event: rating triggers.