A trade that deactivates (typically with zero-recovery) if either party defaults regardless of which is in the money. It also can be a credit contingent instrument, i.e., an OTC derivative instrument that has a knock-out feature contingent on the default of the reference credit with a pre-specified rebate (that can be zero or non-zero). The rebate can also be linked to the face value of the underlying defaulted securities of the reference credit (as in a set-off provision). A credit extinguisher is typically used by investors willing to construct a trade or to obtain a cheaper source of funding. These trades/instruments are not legal in and across all jurisdictions.
A credit extinguisher is also known as a credit contingent knock-out trade.
