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 ?
Finally, it proposes a rule that solves this problem: Congress should allow the seller of a credit default swap to refuse to make a payout to a purchaser that does not negotiate a restructuring with the debt issuer underlying the swap.
Conceived in the aftermath of Drexel Burnham Lambert's (20) creation of collateralized debt obligations (21) in the late 1980s, (22) a credit default swap is a "promise[ ] to make a specified payment in the event a particular debt instrument experiences an event of default, such as a payment default or if the issuer files for bankruptcy protection.
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.
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.
Divided into four parts, this book addresses a variety of important topics, including mortgage credit (non-agency, first and second lien), mortgage securitizations (alternate structures and subprime triggers), credit default swaps on mortgage securities (ABX, cash synthetic relationships, CDO credit default swaps), and much more.
NEW YORK -- Centerbrook Financial LLC ("Centerbrook" or the "Company") today announced that the Company completed its second transaction, providing a pool of credit default swaps in connection with the re-securitization of approximately $175 million of CharterMac's (NYSE:CHC) existing multifamily revenue bonds.
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.

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