A swap that automatically terminates with one counterparty of which having to make no further payments if the other counterparty gets into default. In other words, the trade is knocked-out with a zero-recovery or rebate if either party defaults regardless of who is with net credit (in the money). Accordingly, this swap provides an alternative to posting or requiring collateral.
A zero-recovery swap is a type of credit extinguishers. It is also known as a zero-recovery credit default swap (zero-recovery CDS).
