Credit Default Swap

Credit Default Swap

CDS – A synthetic structure whereby the buyer of the CDS makes a series of payments to the Seller and, in exchange, the Seller of the CDS will compensate the buyer in the event of a Loan Default (for a Loan that is referenced in the CDS). Compensation for Loan Default is usually the Face Value of the Loan.

CDS are a complex financial instrument, and there are a number of different types of CDS. However, they can be a useful tool for managing credit risk.

Here are some examples of credit default swaps in securitisation:

• A bank might buy a CDS on a securitisation of mortgages. This would protect the bank from losses if the mortgages defaulted.
• An investor might buy a CDS on a securitisation of credit cards. This would protect the investor from losses if the credit cards defaulted.

CDS can be a useful tool for managing credit risk, but they also carry some risks. For example, if the protection seller defaults, the protection buyer may not be able to recover their losses.