A Latin phrase that means “on equal footing”, “with equal pace”, or “with equal step”. Credit default swaps (CDSs) are often referenced to “borrowed” obligation, i.e., debt ranking at least pari passu (on equal footing) with other senior unsecured obligations of a reference entity. In general, derivatives exposures typically rank pari passu with senior debt (referenced in credit default swaps) and thus would be expected to have an identical recovery rate.

Furthermore, if the CDS is physically settled, counterparties should specify deliverable obligations, usually pari passu with reference obligations, which the protection seller is required to purchase at par from the protection buyer. If the CDS is cash-settled, the counterparties will have to agree on a market value for the reference obligation.