Credit Default Swaps

Introduction

A credit default swap (or CDS) is a derivative contract the object of which is to insure the buyer of the contract against a default or deterioration in credit quality of a company that has issued debt instruments.

The CDS buyer pays a premium to the seller, and receives in return "credit protection".

The premium (also called the "spread") is frequently expressed as a fraction of an agreed notional amount in basis points (bps).

Buyers and sellers of the CDS contracts include investment funds, hedge funds, insurance companies, and banks.

CDS contracts are quoted and sold through broker-dealers. They are not traded on any public exchange.

Rating of Credit Default Swaps

CDS are not rated by rating agencies. Rating agencies do, however, rate most of the underlying debt obligations that are the subject of CDS obligations.