Credit Default Swap (CDS)

A swap designed to transfer the credit exposure of fixed income products between parties. A credit default swap is also referred to as a credit derivative contract, where the purchaser of the swap makes payments up until the maturity date of a contract. Payments are made to the seller of the swap. In return, the seller agrees to pay off a third party debt in the event of a credit event Credit events usually include bankruptcy and payment default but could also include restructuring and or rating downgrades. A CDS is considered insurance against non-payment. A buyer of a CDS might be speculating on the possibility that the third party will indeed default. The 5 year senior CDS spread (market reference) is the insurance premium which makes it possible to be covered during 5 years against the risk of default of a company. As an example, a spread of 100 basis points means that 100 euros must be paid per year to guarantee 10,000 euros of commitments during 5 years.