Credit default swap

Also found in: Dictionary, Medical, Legal, Encyclopedia, Wikipedia.

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 ?
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.
Instead, credit default swaps came to be used by banks in a way that no one anticipated--to avoid banking regulations.
Currently all major global credit default swap dealers use CLS Bank to settle obligations under credit default swaps.
Currently, all major global credit default swap dealers use CLS Bank to settle obligations under credit default swaps.
Company A takes out a credit default swap for the loan to Company B.
Credit default swap transactions may involve risks of general market decline, illiquidity, counterparty defaults, and adverse credit events.
FT Interactive Data, an Interactive Data (NYSE: IDC) business and a leading supplier of financial information to global markets, today announced that it will offer seamless access to independent valuations of credit default swap (CDS) index trades, helping clients value their increasingly diverse derivatives portfolios more effectively.
At closing, Spinnaker will assume the role of protection seller under the credit default swap with DBS.
The proceeds of the notes will be used to purchase a portfolio of real estate based structured finance securities, consisting of approximately 70% credit default swap (CDS)referencing subprime residential mortgage-backed securities (RMBS), 17% cash subprime RMBS, 9% cash prime RMBS and 4% collateralized debt obligations (CDO).
The ratings address the likelihood that the floating-rate payer will have to make a protection payment under the terms of the credit default swap.
management techniques such as credit default swaps, dollar rolls,
UK-based Barclays Plc (LSE: BARC) has become the third biggest dealer of credit default swaps.

Full browser ?