DEFINITION of 'Reference Entity'
The party upon which the two counterparties in a credit derivative transaction are speculating. The reference entity can be a corporation, government or other legal entity that issues debt of any kind. If a credit event such as a default occurs and the reference entity is unable to satisfy the conditions of the loan, the buyer of the credit default swaps receives payment from the seller.
BREAKING DOWN 'Reference Entity'
In a credit default swap contract, the seller of the transaction is selling protection against the default of the reference entity. The buyer of the securitized credit derivative believes that there may be a chance that the reference entity will default upon their issued debt and is therefore entering the appropriate position.