Credit Default Swap

Glossary

Banking

Credit Default Swap

Credit default swaps are credit derivatives that provide protection to buyers against credit events such as default or bankruptcy of underlying reference entities. A reference entity can be a single name, a portfolio of names agreed upon between buyer and seller, or the set of names in an agreed CDS index. The protection buyer pays a periodic premium to the protection seller, known as the CDS ‘spread’, on the notional amount of the trade. If a credit event in the underlying reference entity is triggered, the seller pays the buyer the notional amount of the trade in return for receiving notional face amount of defaulted assets, or the trade is cash settled based on a central auction price of defaulted assets.

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