credit default swaps (CDS)

Extracted Attributes

• Type

  Financial swap agreement

• Types

  Single-name CDS, Index CDS

• Purpose

  Seller compensates buyer for debt default or other credit event; buyer makes regular payments (fee/spread) to seller for protection.

• Function

  Allows investors to swap or offset credit risk; used to manage default risk or speculate on changes in CDS spreads.

• Naked CDS

  Can be purchased by individuals or entities who do not own the underlying loan.

• Regulatory Impact

  Reshaped by regulation implemented since the 2007-09 financial crisis

• Market Size (2022)

  Reached $38.7 trillion in total activity

• Compensation on Default

  Typically the face value of the loan, or market value in cash.

• Seller's Action on Default

  Assumes ownership of the defaulted loan or its cash equivalent.

Timeline

• Inception of the credit default swap (CDS) market. (Source: Web Search Results)

  1990s

• Rapid surge in growth of the CDS market in the run-up to the Great Financial Crisis (GFC). (Source: Web Search Results)

  2007-09-01

• Calls for strengthened transparency and resilience in the CDS market following its role in the GFC. (Source: Web Search Results)

  2009-01-01

• Beginning of the analysis period for trends in single-name and index CDS market activity. (Source: Web Search Results)

  2019-01-01

• Total CDS market activity reached a high point of $38.7 trillion, driven primarily by index CDS. (Source: Web Search Results)

  2022-01-01

• Single-name CDS activity was at its greatest in the first half of the year, as market participants sought to manage specific credit exposures. (Source: Web Search Results)

  2023-01-01

Credit default swap

A credit default swap (CDS) is a financial swap agreement that the seller of the CDS will compensate the buyer in the event of a debt default (by the debtor) or other credit event. That is, the seller of the CDS insures the buyer against some reference asset defaulting. The buyer of the CDS makes a series of payments (the CDS "fee" or "spread") to the seller and, in exchange, may expect to receive a payoff if the asset defaults. In the event of default, the buyer of the credit default swap receives compensation (usually the face value of the loan), and the seller of the CDS takes possession of the defaulted loan or its market value in cash. However, anyone can purchase a CDS, even buyers who do not hold the loan instrument and who have no direct insurable interest in the loan (these are called "naked" CDSs). If there are more CDS contracts outstanding than bonds in existence, a protocol exists to hold a credit event auction. The payment received is often substantially less than the face value of the loan.

Web Search Results

• Credit Default Swap: What It Is and How It Works - Investopedia

  A credit default swap (CDS) is a financial derivative that allows an investor to swap or offset their credit risk with that of another investor.

• Credit default swap - Wikipedia

  However, if the associated credit instrument suffered a credit event at t 5, then the seller pays the buyer for the loss, and the buyer would cease paying premiums to the seller. A "credit default swap" (CDS) is a credit derivative contract between two counterparties. The buyer makes periodic payments to the seller, and in return receives a payoff if an underlying financial instrument defaults "Default (finance)") or experiences a similar credit event.( [...] Credit default swaps allow investors to speculate on changes in CDS spreads of single names or of market indices such as the North American CDX index or the European iTraxx index. An investor might believe that an entity's CDS spreads are too high or too low, relative to the entity's bond yields, and attempt to profit from that view by entering into a trade, known as a basis trade, that combines a CDS with a cash bond and an interest rate swap._[citation needed_] [...] Credit default swaps are often used to manage the risk of default that arises from holding debt. A bank, for example, may hedge its risk that a borrower may default on a loan by entering into a CDS contract as the buyer of protection. If the loan goes into default, the proceeds from the CDS contract cancel out the losses on the underlying debt.(

• [PDF] Do Credit Default Swaps Still Lead? The Effects of Regulation on ...

  Boyarchenko et al. (2019) and Augustin et al. (2016), respectively, while additional information on post-crisis regulation pertaining to derivatives trading is available in Boyarchenko et al. (2018). 2.1 Credit Default Swaps A CDS is a derivative contract that provides synthetic insurance against a credit event affecting the underlying. Single-name CDS reference individual firms and require the seller to pay the buyer the notional amount of the contract times one minus the recovery rate of the [...] Regulation implemented since the 2007-09 financial crisis has reshaped the credit default swap (CDS) market. In this paper, the author explores whether the reforms have affected the price discovery process for corporate credit by altering the primacy of CDS over corporate bonds and credit ratings as an information source. [...] 2017), however, and a number of frictions, including high short-selling costs and dealer inventory constraints, have long compromised price efficiency in the corporate bond market (e.g., Friewald et al., 2012; Oehmke and Zawadowski, 2015; Bessembinder et al., 2018). The growth of credit derivatives in the early aughts created a new venue in which to express information on default risk. The credit default swap (CDS) market, in contrast to its bond counterpart, proved to be a relatively

• Analyzing Trends in Single-name CDS and Index CDS Market Activity

  This paper analyzes the credit default swaps (CDS) market from 2019 to the first half of 2024, focusing on trends in single-name CDS and index CDS market activity. Over this period, total CDS market activity reached a high point of $38.7 trillion in 2022, driven primarily by index CDS. [...] Index CDS trading peaked in 2022 as market participants hedged against broader market instability during a period of heightened uncertainty. As macroeconomic conditions stabilized and central banks moderated their rate hikes, demand for index CDS declined in 2023 and the first half of 2024, but activity remained above 2021 levels. Click on the attached PDF to read the full report. Tags: Credit, Credit Default Swaps (CDS) [...] Single-name CDS activity was at its greatest in the first half of 2023, as market participants sought to manage specific credit exposures and protect against anticipated changes in the creditworthiness of individual entities, especially in the banking sector. Although it fell in the first half of 2024, single-name CDS activity remained above 2022 levels, reflecting sustained demand for credit risk protection.

• The credit default swap market: what a difference a decade makes

  Over the last decade, the size and structure of the global credit default swap (CDS) market have changed markedly. With the help of the BIS derivatives statistics, we document how outstanding amounts have fallen, central clearing has risen and the composition of underlying credit risk exposures has evolved. Netting of CDS contracts has increased, due to the combination of a higher share of standardised index products and the clearing of such contracts via central counterparties. In turn, this [...] ##### JEL classification: G23, G28. After its inception in the early 1990s, the credit default swap (CDS) market saw a steady increase in volumes, followed by a rapid surge in growth in the run-up to the Great Financial Crisis (GFC) of 2007-09.2 The size of the market and the role it played in the crisis led to calls for strengthened transparency and resilience (CGFS (2009)). [...] 5 Single-name CDS are credit derivatives where the reference entity is a specific debtor such as a non-financial corporation, a bank/dealer, or a sovereign. Multi-name or index CDS refer to contracts where the reference entity is composed of more than one name.