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 ?
BEIRUT: The prospects of a limited war between Hezbollah and Israel has increased pressure on Lebanon's Eurobonds as the county's 5-year credit default swaps (CDS) rose by 21 basis points (bps) from Tuesday's close to 1229 bps, data from IHS Markit showed.
PHK's effective leverage ratio was approximately 25%, which included preferred shares, reverse repurchase agreements, and credit default swaps.
However, UBS Willow Management changed course in 2008 and instead of focusing on investments in debt issued by troubled companies, it had the fund purchase large quantities of credit default swaps, a strategy predicated on the debt decreasing in value.
The decline in credit default swaps comes amid signs of a pick-up in world economic growth with the International Monetary Fund planning to raise its forecast in about three weeks, Managing Director Christine Lagarde said this week.
Created to hedge risks, credit default swaps quickly evolved into speculation instruments at the expense of enterprises or states in difficulty.
Financial dictionary: CDS (Credit Default Swap) What are they?
Berkshire sells protection against the default of states, towns and cities using credit default swaps. In these contracts the company would be required to reimburse its counterparty for debt losses in the event of a municipal bankruptcy.
Although Dodd-Frank's regulation of credit default swaps may succeed in stemming some of the systemic risk that these derivative financial instruments create, the statute does not prevent credit-default-swap holders from forcing companies into bankruptcies that otherwise would not occur.
It means payments of credit default swaps (CDS) - insurance mechanisms against default - totalling about EUR 3.2 B have not been triggered.
BNP Paribas Securities Corporation, the US registered broker dealer of BNP Paribas Corporate and Investment Banking and a part of France's BNP Paribas (BNPP.PA) (LSE: BNP) (OTC: BNPQY), has said that it has joined CME Group, a leading derivatives marketplace, to clear Credit Default Swaps (CDS) and Futures and over-the-counter (OTC) Interest Rate Swaps.
Lending money and then insuring against the possibility of default by the borrower - whether it's a business, individual, a sovereign state or a bank - creates the market of Credit Default Swaps. And they're here again to haunt us.
A close examination of Greek credit default swaps shows that while investors have lowered their expectations of a Greek default, they still believe that the probability of a default remains very high.