Credit default swap


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Credit default swap

A credit derivative contract between two parties where the buyer makes periodic payments (over the maturity period of the CDS) to the seller in exchange for a commitment to a payoff if a third party defaults. Generally used as insurance against default on a credit asset but can also be used for speculation.

Credit Default Swap

A swap in which the buyer makes a series of payments and, in exchange, receives a guarantee against default from the seller on a designated debt security. That is, the buyer transfers the risk that a debt security, such as a bond, will default to the seller, and the seller receives a series of fees for assuming this risk. In some ways, a credit default swap is like insurance, but there are significant differences. Prominently, the buyer of the credit default swap need not own the underlying debt security. Thus, the buyer may be speculating on the potential for default on the designated security. Likewise, the seller is not required to have the cash available to pay the buyer in case the designated security does default. This lack of regulation has raised concern, especially during the late 2000s credit crunch.
References in periodicals archive ?
This created a huge demand for credit default swaps as a kind of regulatory arbitrage.
It convinced itself, however, that only a sliver of the claims on those credit default swaps would come due.
We stand ready to play a constructive role in whatever overall regulatory environment ultimately emerges for the credit default swap market.
NEW YORK -- The idea that the industry lacks a central registry for over-the-counter (OTC) credit default swaps (CDS) is grossly misleading and has resulted in inaccurate speculation on a number of matters, including the overall size of the market, its role in the mortgage crisis, and the size of potential payment obligations under credit default swaps relating to Lehman Brothers.
Specifically, under current law, parties who invest in a company's debt and who have also purchased a credit default swap on that investment have incentive to resist that company's attempts to restructure its debt in order to avoid bankruptcy, even when a restructuring would be beneficial to other creditors and the economy at large.
Lockyer said that he is concerned that speculative trading of credit default swaps could boost borrowing costs.
In a preliminary research paper, Duffie, and GSB doctoral student Haoxiang Zhu, conclude that the central clearing houses founded to rationalize the $27 trillion market for credit default swaps will not remove nearly as much risk as regulators might hope.
Credit default swaps are tradable financial derivatives that function as a default insurance contract for corporate debt.
Centerbrook continues to build its book of business, having completed close to $1 billion of credit default swaps in our first two months of operations," said Robert D.
IXIS"), Centerbrook will be a provider of credit intermediation products, including credit default swaps, to the affordable housing finance industry.
NEW YORK -- Fitch Ratings compares the unique structural aspects of loan-only CDS with the cash loan market and suggests that the creation of a standardized trading framework for loan-only credit default swaps (LCDS) may help spur the use of this structure.
Vietnam's credit default swaps (CDS) hit their widest in 11 months on concerns about the country's balance of payments after the IMF warned foreign reserves covered only seven weeks of imports.

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