Talk:Credit default swap

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 CDS Calculation

As an example, a A Bank (The Buyer) buys the 3 Times Enhanced Credit Return Investment –the 3 Times ECRI (or a Credit Default Swap) from B Bank (The Seller), where the reference entity is bond. The following definitions are given in their Confirmation: 1. Issue amount  : USD10 mio. (or the Investment by B Bank deposited to A Bank in 5 years with 6 month Euribor per annum payable semi-annually) 2. Incremental Issue amount  : USD20 mio. 3. Reference Credit Default Swap Notional: USD30mio

                 ( or Issue amount plus Incremental Issue amount)

4. Dealing CDS Spread at effective date: 40 basis points (Premium) 5. Reference CDS Top up Trigger : 300 basis points ( or upon occurrence of a Top-Up Event, B Bank has two choices: increase Issue amount from USD10 mio to USD30mio. or fail to exercise its Top-Up Option and

its Investment will be redeemed by paying the Early Redemption Amount)

During the course of transaction, the Buyer makes periodic semi-annual payment 3 Times x 40 basis points = 120 basis points plus 6M Euribor for Issue amount of USD 10mio. (10M x (6M Euribor + 3x40 bps x 0.01%)/2 ) to the Seller. However, due to not exercise of Top Up Option, the Seller terminates ECRI at the prevailing CDS price at 350 bps and receives the Early Redemption Amount (100%-CDS Unwind Cost) : For calculation Market value of Reference CDS Unwind Cost, the questions are: 1. Reference Credit Default Swap Notional is USD10 mio.? or USD30mio.? 2. Premium is 40 bps? or 120 bps? 3. The following formula of Reference CDS Unwind Cost is right? USD30mio. x 310 bps widening (350 bps – 40 bps) x 0.0353% (Sprd DV01/USD30mio. or CDS Price Sensitivity equals 0.0353% per 1 bp) – interest accrued


Interest Payments Need To Be Highlighted[edit]

  • Buying and selling the indices can be compared to buying and selling portfolios of loans or bonds.
  • The indices trade at a fixed coupon, which is paid quarterly


  • Is “long” the index similar to buying a cash portfolio
  • Receives the fixed coupon quarterly
  • Assumes the credit exposure, is exposed to defaults
  • Is equivalent to selling protection
  • Pays up front the accrued coupon (from start of quarter to buy date) because at the end of the quarter will be paid a full coupon


  • similar to selling a cash portfolio, is Is “short” the index
  • exposure is passed on to another party, this position wins on defaults
  • is equivalent to buying protection
  • Receives up front the accrued coupon (from start of quarter to sell date) because at the end of the quarter will pay a full coupon to the buyer


"The indices trade at a fixed coupon, which is paid quarterly (except for EM which is semi-annual) by the buyer of protection on the index, i.e. a short index position, and upfront payments are made at initiation and close of the trade to reflect the change in price." --pretty tortured language but taken apart, step by step, begins to make some sense. Rick (talk) 13:56, 31 May 2012 (UTC)

Old vandalism or error[edit]

The first image in the article has chopped up non-sensical text in the caption. The edit that produced it is from Dec 2012 and was a delete of some images and mangling of the caption. User was IP address and produced only this single edit. Last version with images and captions before vandal/error. and here it is after Mavaction (talk) 21:15, 23 February 2013 (UTC)

Added back images and full captions that were hastily altered. Restored those images and captions to the last state before the harmful edit. Mavaction (talk) 21:52, 23 February 2013 (UTC)

Insurable Downgrade?[edit]

The article asserts that sometimes CDSs will pay in the event of a downgrade. I see no evidence for this in the cited source, although I would be happy to be proved wrong. — Preceding unsigned comment added by (talk) 17:52, 7 November 2011 (UTC)

I believe this can be seen on page 7, in the org chart of CDSs. One type of exotic CDSs is "rating-triggered CDSs". (talk) 10:10, 11 May 2012 (UTC)

CDS = Ponzi Scheme ?[edit] this wiki page is fundamentally flawed, it lacks deeper references to warnings of the risk and dangers of CDS.

Absolutely right. This will be viewed in the future as nothing more than zeitgeist. This page should mention that it was written in 2008/2009 and should also mention that bank nationalisations and currency problems will in all probability result in CDS armageddon. ( (talk) 22:35, 26 February 2009 (UTC))

A second absolutely right. It is kind of funny to see the earnest defense of CDS's and how there really isn't anything wrong with something that creates 62 trillion in notes < 5 years when the entire market capitalization of all the worlds businesses is 40 trillion as of September 2008. On the other hand it might be good to wait until the armageddon happens to write a complete post-mortem. (talk) 19:51, 10 March 2009 (UTC)

83.135, since your FT article was written in September we’ve seen huge CDS positions involved with Lehmen and other events unwind without major incident. Few if any serious analysts Im aware of question that used properly CDS is a very efficient means of managing risk –so they can benefit everyone. I wouldn’t oppose further tightening of regulation on ‘naked’ speculation, but it would be misguided to blame CDS alone for the current crises. The root cause is much deeper - mis placed faith in the efficiency of the free market. Anyone is free to edit the criticism section and expand it, but rebuttals are easy for us to find. Im not defending CDS as ive capitalist sympathies, I hope my other edits show im very much on the economic left, and I haven’t worked in an investment bank for years. There is no nefarious purpose among us defenders, editors just want to provide the public with an accurate balanced view. FeydHuxtable (talk) 13:25, 11 March 2009 (UTC)

Comments by John Fitzgerald.

I am not sure that the above comments are based in fundamental insight rather than in an initial distaste for capitalism based upon experiences of where capitalism goes wrong. I suggest this as, in reading the comment above, it makes general statements regarding what might be the underlying issue (i.e. "mis placed faith in the efficiency of the free market") without either explaning what the specifics are in the underlying issues that are causal or presenting solutions to modify capitalism in a manner that would fundamentally correct for the issues. What I am looking for are statements that present fundamental causality in a "physics" sense and lead to solutions. (Or at least point in the direction of potential solutions.)

I would like to suggest an underlying issue, that of a mis-application of the fundamental theory of a free market and a mis-application of the concepts of expected value. We might wish to consider the events surrounding the collapse of the company Long Term Capital Management and the failure in applying the statistical model of expected value and in applying the basic model of a free market system to the reality of a global economy. There, as with the recent melt-down of AIG, the unlikely event of the statistically improbable really occured on a global level.

Simply stated, the misinterpretation of the application of the basic model of the free market system to the capitalism which we enjoy is that the model assumes complete randomness of infintesimally small entities which are otherwise independent and it assumes that the game can be played forever.

Consider the basic model of expected value. The buyer of the insurance is ensuring against the risk of an unexpected event, suppose it to be a loss of $100 in the next year with a 5% probability of occurance. The seller of the insurance is to determine the amount that the buyer should pay for the insurance. The expeted value of the insurance policy is given by given by E= 0.95 * $0 + 0.05 * $100 = $5. The buyer should then pay $5 for the insurance policy. To be more realistic, the insurance company is in a business to at least pay the wages of employees and other costs so an additional $1 is added to the total price of the policy for a total cost of $6.

This model makes a fundamental assumption that is never true in the real market. The underlying assumption is that the game is played an infinite number of times with an infinite number of buyers forever. Another assumption is that the events upon which losses occur are completely random. Another assumption is that the seller of the insurance has an infinite amount of resources to cover the losses that will occur on the unlikely event that the infinite number of statistically independent policies should all pay out at the same time.

Yet, economics itself is defined as the study of the allocation of limited resoures.

Here in lies the issue. The model of a free market is based on infinite resources. Economics theory studies finite resources. The tools of statistics that are applied to economics quickly abandon the concept of finite resources because it gets a little too complicated. The reality of capitalism is that it isn't really a "free market" in the statistical sense. (On the flip side, the "planned economy" fails in the assumption that all things can be planned.)

The writer's comment above states, "The root cause is much deeper - mis placed faith in the efficiency of the free market." But what does the writer mean by this? Is he advocating throwing out the free market model? Does he really mean the "free market" as it is played out in the reality of capitalism? What does he mean by "bank nationalisations and currency problems will in all probability result in CDS armageddon"? While I get the authors sentiment and certainly agree that there is something fundamentally flawed as indicated by the cyclical market meltdowns that have been played out time and again for 2000+ years, I find he presents his case based upon a lack of definitiveness in his words or statements. Let's face it, as educated as I may be, I have no clue what a "zeitgeist" is. I get that it is presented as a bad thing. Everyone gets this. But the term is not one that communicates much in a public forum as it is obvious that a good number of people are going to need to look it up. (Unfortunately, so are to many when it comes to the basic concept of expected value).

I hope I have made a case for what exactly is the "mis placed faith in the efficiency of the free market" and how this misplaced faith is endemic to our presentation of business theory. What I am suggesting is an individual due diligence in attending to fixing the underlying issue of fundamental education in applying statistical models to the reality of our mixed economy, due diligence in defining the exact meanings beneath "mis placed faith" and the presentation of a soltuion to this problem such that our converstation is not locked in an endless circulation of fundamentally true sentiments that lead to no final solution. Perhaps we might do well to examine and re-examine the technical details of expected value with each and every statement until 90% of the population gets it rather than 10% because the expected value of the free-market is not the same as the expected value of European-American capitalism. (How about "Amer-opean" or "Euro-can"?)

Thank you.

-John Fitzgerald March 21, 2009

P.S. I wonder if the writer meant for the reader to go look up "zeitgeist". I certainly indend for the uninitiated reader to find out what "expected value" and "Long Term Capital Management" are. —Preceding unsigned comment added by Dogsinlove (talkcontribs) 19:53, 21 March 2009 (UTC)

Insider Trading[edit]

This article might need some text about insider trading (and other aspects of missing regulation) of CDSs in the article. I mean situations, in which somebody with insider information of a forthcoming credit event buys protection from said event. I think this is a big issue in the CDS market. Reiska 15:24, 3 August 2007 (UTC)

Anyone with access to insider information usually is supposedly restricted in their ability to transact on it anyway, but even if they do, so what? It's a good thing, isn't it? They've transmitted information to the external market, which will cause other people to be more wary of that company because of the higher spreads. Tristanreid (talk) 17:22, 13 June 2008 (UTC)
No - because the CDS market is not regulated by the SEC as the stock/bond markets are, traditional insider-trading laws do not apply. Trades don't even have to be reported / sent through a clearinghouse! —Preceding unsigned comment added by (talk) 09:12, 13 December 2010 (UTC)

CDS Agreements in a Bankruptcy[edit]

What about credit risks associated with CDSs themselves? What if the risk seller goes bankrupt after the buyer has paid a lot of premiums? What is the status of the CDS agreement in bankruptcy proceedings? Are there any precedents? Reiska 15:24, 3 August 2007 (UTC)

This is the most important point about cds and nobody ever really thinks about it. If you own a bond hedge with CDS the diff is not free money as some assume, its the price of credit risk of that cparty. If bank risk start to deteriorate the value of your 'hedge' gets severely undermined. The bank may nevr actually go bust, but as LTCM found out, you dont need to have a default for this to cuase some severe pain. The only real way of hedging a bond is by selling it.


I guess the CDS will usually be handled like any other item in case of a default. If it has positive market value (protection buyer pays 50 Bp, while current fair value credit spread is only 30 Bp.) the CDS will probably be sold and will continue on. OTOH if it has a negative value (either because of a default or because current credit-spreads are wider) the protection buyer would simply receive its quota.

However, CDS trades are usually not done without CSA (ISDA Credit Support Annex) to limit counterpart risk by margin calls. 18:13, 22 August 2007 (UTC)

CDS, like many other financial products, are exempted from the automatic stay in bankruptcy. So, parties will be able to collect on their claims before other creditors can. This further mitigates counterparty risk. Erdosfan (talk) 19:00, 22 February 2009 (UTC)

What about deteriorating bank risk?[edit]

It makes sense that the cost of ensuring a weak credit might be 140 ( Philippines for example ) and a weaker bank such as Lehman (cost 110). But what price should a cds with lehman be for philippines? Ive got two risks, Phil AND Lehman. Given spreads are similar probability of default must be similar. If lehman were to go bust before Philippines Id lose my hedge and it may cost me a lot more to replace the contract with someone else. If Phil goes bust the I get my protection unless Lehman then go but as a result (cant meet payements on default). But its not just Lehman, banks in general. It is not true that banks are too big to fail, look at Continental Illiois or Northen Rock? It doesnt seem to make any sense for bank paper to trade close to risky credits as that would imply that they are both as risky. Whats the point of ensuring yourself with an entity that is just as risky? Im sure Northern Rock didnt trade CDs (did they?), but what price would you pay NR to ensure you against other companies defaulting? Nil?

Generally you require the counterparty to post collateral to make up for the difference in the current and market premia. The problem is that this isn't enough to completely ameliorate the counterparty risk, and it also adds the problem of a short-term cash shortfall to make collateral calls (which is the problem with any unfunded asset) Tristanreid (talk) 17:39, 13 June 2008 (UTC)

Question on 2nd example[edit]

In the example given under speculation, I don't quite understand why the premium on the CDS would be $100 000.
Zain Ebrahim 09:50, 7 September 2007 (UTC)

this isn't about the 2nd example, this is about the first example -

If the reference entity (XYZ Corp) defaults, one of two things can happen:

Either the investor delivers a defaulted asset to ABC Bank for a payment of the par value. This is known as physical settlement.

shouldnt that say ABC delivers the asset to the investor?? I dont see why the investor would have to pay ABC further if the reference entity defaults. —Preceding unsigned comment added by (talk) 15:31, 20 January 2009 (UTC)

Sorry to gush, but I love this website and especially the discussion section. About the first example: what is a "one-off payment"? —Preceding unsigned comment added by (talk) 11:51, 22 March 2009 (UTC)

Recognized Credit Events[edit]

Are rating downgrades recognized credit events? —Preceding unsigned comment added by Gonzen (talkcontribs) 13:55, 19 October 2007 (UTC)

Good question. I'll check and get back to you. If I were to guess, I'd say that there's nothing stopping two counterparties entering into such an agreement. Zain Ebrahim (talk) 22:15, 30 April 2008 (UTC)
Yes, downgrades are credit events. And while two counterparties can enter into any agreement they want, CDS are generally well defined by ISDA agreement. The advantage is that the contract becomes liquid, they can use another contract to unwind the first. Tristanreid (talk) 17:24, 13 June 2008 (UTC)
No, downgrades are not (ordinarily) credit events. PIMCO[1] and others[2] list the most common events on their investor page: basically, debt default, failure to pay on time or unfavourable debt restructuring. The ISDA[3] says that downgrades are only a credit event in ABS, and only in the case of a downgrade below CC (which is pretty much the sign of an impending default anyway). -- Marcika (talk) 08:19, 7 August 2008 (UTC)
This could be merged with the first comment on this talk page. (talk) 10:13, 11 May 2012 (UTC)

Technical minutiae[edit]

I've removed the previous edit about CDS trading at par, which is not necessarily the case for cash bonds, because this is alluded to in the preceding sentence about the basis arising from "technical minutiae". Pls feel free to revert my changes or, better yet, provide a list of the technical minutiae that result in the basis. Finnancier (talk) 15:36, 3 January 2008 (UTC)

The hedging example[edit]

Just a thank you to the editor, who explained in nice basic terms, the cash flow construct of a CDS transaction between two parties. Helped me understand the concept and logic behind the contract better than many textbooks could! (talk) 23:22, 8 January 2008 (UTC)

In the Example You have mentioned only about the If the XYZ company doesnt default. i.e., Hedge fund would gain about $500,000 by selling it to another party as the spread has increased to 1500 basis points with the condition that the XYZ has not defaulted . But what if the XYZ defaults in about 1 1/2 year ? status : 2 years contract with ABC for 500 basis points after one year hedge fund has sold to 3rd party for 1 year 1500 basis points —Preceding unsigned comment added by Nmsabhishek (talkcontribs) 17:01, 27 December 2008 (UTC)

The hedging example[edit]

Good writing but how are the values in this example calculated? propably obvious but wuold be good to show the calculateions in verbatim format... (talk) 11:46, 30 January 2008 (UTC)

"The market for credit derivatives is now so large, in many instances the amount of credit derivatives outstanding for an individual name are vastly greater than the bonds outstanding. For instance, company X may have $1 billion of outstanding debt and $10 billion of CDS contracts outstanding. If such a company were to default, and recovery is 40 cents on the dollar, then the loss to investors holding the bonds would be $600 million. However the loss to credit default swap sellers would be $6 billion. In addition to spreading risk, credit derivatives, in this case, also amplify it considerably."

The calculation appears to be in error. The loss to the holders of the bonds would be $600 million if they had not purchased a credit default swap, and $0 if they had purchased a credit default swap. The loss to the credit default sellers would be $9.6 billion as there are only $1 billion in outstanding bonds that can be sold for $40 cents on the dollar. Pringle1972 (talk) 19:29, 25 September 2008 (UTC)
You make a good point, but you're assuming that none of the insurers have any coverage themselves, and that none of the insurers are insuring each other, OR that all insurers of insurers will also default at the same time as the bond issuer. The first case is an unlikely one because CDS sellers buy other CDS's to hedge the risk they have assumed on the first one. Why would someone buy the insurance if they don't have any exposure to the underlying bond? That's the only way $10 billion of contracts would have been generated under the conditions of the first case - 9/10ths of the buyers would be paying to insure bonds they aren't even exposed to. Even in this case, they won't lose the full notional value, they will lose he premiums paid. In the second case, where everybody including all the CDS sellers defaults all at once, the losses are still limited to premiums paid plus the unrecoverable bond. In both cases, the total losses wouldn't exceed $6 billion, because in the first case we don't assume that insurers default, and in the second case the defaulting insurers don't lose the value of the commitment they defaulted on. -- (talk) 17:59, 28 September 2008 (UTC)

Please clarify the first paragraph[edit]

If someone stumbles in here who knows that they are talking about, could you please rewrite the introductory paragraph so that it's comprehensible?

"A credit default swap (CDS) is a bilateral contract under which two counterparties agree to isolate and separately trade the credit risk of at least one third-party reference entity. Under a credit default swap agreement, a protection buyer pays a periodic fee to a protection seller in exchange for a contingent payment by the seller upon a credit event (such as a default or failure to pay) happening in the reference entity. When a credit event is triggered, the protection seller either takes delivery of the defaulted bond for the par value (physical settlement) or pays the protection buyer the difference between the par value and recovery value of the bond (cash settlement)."

  • What is a "reference entity". Is there any relationship between the ref ent and one of the other parties?
  • Presumably the "protection buyer" and "protection seller" in the 2nd sentence are the "two counterparties" of the first sentence?
  • What does "happening in the reference entity" mean?
  • "takes delivery of the defaulted bond": What bond? Is this a bond previously issued by the "reference entity". Is a bond always involved or is this just an example?
  • Indeed, does there need to be any actual debt involved for the two parties, or are the "two counterparties" simply betting on something happening?

Thanks (talk) 00:30, 23 February 2008 (UTC)

Firstly, I agree that the opening paragraph is not very comprehensible to a person who does not already understand CDS contracts (i.e. anyone who would want to read this article).
A CDS works as follows. Bank A enters into an agreement with Bank B to trade the credit risk on some counterparty (General Motors (GM) for example). Let's say A has purchased a Corporate bond issued by GM. If GM defaults then A will incur a loss. The CDS will be structured so that if GM defaults then B will cover A's losses.
This is a very simplified explanation and there are several other issues. For example, A need not have any exposure to GM but may still enter into the above agreement for purely speculative purposes.
To answer your questions then:
  • GM in this case but it may be any other corporate entity. In fact, as far as I know, the CDS may be entered into without the reference entity even being aware of it.
  • Yes. A would be the protection buyer and would usually pay B regular coupons.
  • I'm sure you can figure this one out now.
  • This is just an example and it should be clarified in the article.
  • Yes, that may be the case.
Zain Ebrahim (talk) 14:55, 25 February 2008 (UTC)

Questionable para under "Criticisms"...[edit]

The 4th para ("Derivatives such as credit default swaps also create major distortions in the traditional indicators...") seems to be saying that stocks of failing companies aren't sold down in the market--but that, as we all see everyday, is BS. Any company reporting any major performance or credit or accounting issue is IMMEDIATELY cut down to size in the stock market, and this IS reflected in any index that it is part of. So I'm not seeing the basis for this theory that derivatives cause false index stability. At least as far as any major stock index is concerned (e.g. S&P 500). I would like to see some references for this theory, and/or a more convincing presentation of it. If it's purely the author's idle speculation, I recommend this para be removed. Rep07 (talk) 19:12, 25 February 2008 (UTC)

I've removed it entirely, and the paragraph above it as hopelessly POV original research. There are grains of truth in some of what I removed, but the veracity of the material on the whole isn't good enough to justify remaining. The asymmetric information part is salvageable, but needs a source. In order that the material can be retained, but without copying it all here, here's the diff where I removed it. If someone thinks it would be valuable to copy here, go ahead, but it really shouldn't go back in wholesale without some sources and some POV reduction. And here's the diff where an anon added it in the first place. - Taxman Talk 15:01, 7 April 2008 (UTC)
I agree with the remove. It was unsourced, mostly incorrect, POV and poorly written. The article is a lot better without it.
But I'd just like to reply to Rep07. Whoever introduced that section into the article wasn't refering to "reports" of a major issue, he/she was merely saying that the big players (JPMorgan etc) would normally have more information than everyone else and instead of selling their exposure to a company that they think might decline, they could simply buy insurance which would result in an incorrect price and hence index value. Zain Ebrahim (talk) 15:25, 2 May 2008 (UTC)

Another criticism-related issue: The Warren Buffett references seem to try to undercut his argument ("It is also worth noting that Buffett seems to have since changed his stance on derivatives since he made this statement"), and aren't really accurate. Buffett quite clearly explains his position in his 2008 letter (pdf) to shareholders, and details the what's and why's of Berkshire's limited derivative holdings. So I plan to revised this section at some point (without getting too in the weeds about Berkshire Hathaway). —Preceding unsigned comment added by (talk) 16:12, 11 March 2009 (UTC)

Opening section[edit]

I cleaned up the opening section and added a ref. Any comments? Zain Ebrahim (talk) 23:26, 30 April 2008 (UTC)

We need to update this page, post haste! AIG's failure due to its huge credit default swap debt, as well as the sheer scale of this whole mess, has made it incredibly important in the US and global economy. For one thing, the amount of CDS debt now is not $45 trillion, but $70 trillion! This has the potential of bringing down the entire economy, if the whole thing goes balls up. Saukkomies 11:20, 18 September 2008 (UTC)

A few days ago there was a link to this: Why was it removed? I think it is important to note why regulation on CDS's is banned. —Preceding unsigned comment added by (talk) 18:53, 9 October 2008 (UTC)


I came here after seeing an item on BBC2's Newsnight, hoping to get some clarification in plain English about what Credit Default Swaps are.

I was totally disappointed.

Anyone who can explain to a layman what is going on, given the enormous sums of money involved, will be doing me a favour. No-one who didn't already know what "CDS" meant would not leave this article much wiser.

cannon—Preceding unsigned comment added by Cannonmc (talkcontribs)

Could you perhaps clarify which part of the first paragraph confused you? A pays B regular payments and B promises to pay A a large sum if C defaults. Please read the first paragraph again and tell us which part of it you find confusing. Thanks, Zain Ebrahim (talk) 08:34, 7 August 2008 (UTC)
You know what? Your second sentence is the most comprehensible explanation of this I've seen yet. Why can't some derivation of this be the lede? As it is it attempts to take in too many synonyms, and the post at the beginning of this thread is the result. Daniel Case (talk) 18:53, 28 September 2008 (UTC)
That's pretty close, but B often also promises to pay A a series of smaller sums if C is in trouble, and D is responsible for deciding if C is in trouble and just how much trouble it is in. Edward Vielmetti (talk) 21:46, 28 September 2008 (UTC)
Ah ... so it isn't quite as simple as a game of chicken between lender and third party over whether the borrower will default. Still, we should get this in the lede. Daniel Case (talk) 04:26, 29 September 2008 (UTC)

Re-gig the first three paragraphs[edit]

I know what CDS's are, but the first two paragraphs are way too complicated to introduce people to this rather complex instrument.

History Needed[edit]

Can anyone supply a history of this product? Probably some form of CDS can be traced to the Champagne Trade Fairs of the 12th-13th centuries; their 21st century, thermonuclear application needs elucidation.

teneriff (talk) 19:51, 21 September 2008 (UTC)

sorted! The word on the street is the idea was first conceieved during on one of Morgans Corporate Jollys. I couldnt find a web reference for that , and Im not sure theres any need to name the individuals most responsible, but at least this article should name the Bank that introduced the product. FeydHuxtable (talk) 18:02, 2 November 2008 (UTC)
try william s. demchak and blythe masters, both JP Morgan. and (talk) 11:01, 19 November 2008 (UTC)

credit default insurance[edit]

Isn't this also called "credit default insurance"? or is that the insurance version? (i.e. seller actually set up a reserve) --Voidvector (talk) 08:33, 25 September 2008 (UTC)

If one were to read this article posted by Time back in March 2008 [4], these credit defaults look to have the leapord's spots. Let's put a wager on my toaster and see if it fails to toast my bagel in the morning. The cost would be minimal and the consequences a lot less damaging to society. Ronewirl (talk) 04:24, 21 November 2008 (UTC)

There's an excellent section here called "not insurance". As in, not credit insurance, not like another kind of insurance. a CDS is NOT any kind of insurance. A gangster may try to tell you "protection" tell you to think of it "as a kinda, you know, just call it insurance." That's not insurance either.

It is not any kind of insurance. Words are specific and WP needs to honor that. I can understand some reasons why someone would want to do that. Reasons that are based on finding it hard to analogize what they are, and reasons where someone might want to to make them sound less relevant to the meltdown than they were. Jackhammer111 (talk) 03:09, 22 January 2011 (UTC)

there are good arguments even in the law community to qualify cds as credit insurance. This section is a biased view. Even professionals disagree (Mary Walsh, Risky Trading Wasn’t Just on the Fringe at A.I.G., New York Times 31.01.2010). — Preceding unsigned comment added by Rick AUT (talkcontribs) 15:26, 3 March 2011 (UTC)

I agree that the non-insurance section seems biased. Essentially, the argument that a CDS should not be classified as insurance boils down to the contract not being sold by a regulated insurance company. At least to me this sounds like a There are examples of insurance products being sold in unregulated markets (e.g. fronting arrangements - no wiki article), and to individuals without insurable interest (e.g. It's not important what something is called. What's important is what it is.
"In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment"
This is from, and at least based on my reading, a CDS would be classified as insurance. Unmasked (talk) 20:57, 7 August 2011 (UTC)
I disagree. CDS has a lot of differences from traditional insurance, as noted in the article. The biggest one, of course, as the article already notes, is the fact that insurance is based on losses actually incurred while CDS is not. Also, there is still a lot of debate as to whether fronting arrangements are actually insurance (I worked on a case once involving a very unusual fronting arrangement in which that was an issue), while STOLI smells a lot like gambling, which is why it's restricted. --Coolcaesar (talk) 15:02, 8 August 2011 (UTC)
Coolcaesar, you are correct. CDS is not insurance, for the reasons you articulate. CDS are a complex product and are hard to secribe in a WP article, but we shouldn't resort to misleading oversimplification to make our jobs easier. Bond Head (talk) 18:01, 8 August 2011 (UTC)
This is an insignificant and largely semantic difference. Is life insurance, then, not actually insurance because you aren't payed according to your losses? All of the differences which the article points out are either circular arguments or sad attempts to try to convince people that miniscule differences should exempt this insurance from being regulated. The only other argument that is not simply "It's not insurance because it isn't regulated" is that the holder of the insurance doesn't have to be the party at risk of loss. Imagine if an auto insurance agency allowed me to sell my auto insurance to a stranger so that he would get the payment if I wrecked my car. Coolcaesar would probably advise that we should deregulate auto insurance if they started this practice. This article is arguing that because we can do this type of thing with CDS, they shouldn't be regulated. This article reads like it was written by a lobbyist. — Preceding unsigned comment added by (talk) 15:55, 25 April 2012 (UTC)

weasel words[edit]

I read the first paragraph, and my eyes glaze over. Can this be rewritten in english please? esp. a version of english designed to enlighten and not to confused. Edward Vielmetti (talk) 06:48, 27 September 2008 (UTC)

Financial WMD's? Global systemic risk?[edit]

This article must be getting lots of views from people who want to know why CDS keeps being talked about as the systemic risk that threatens the entire global financial system, and justifies the unprecedented actions of the U.S. Treasury and Federal Reserve. The existing descriptions of Buffet's criticism and of the amplification of the risk associated with some specific liability aren't enough information nor enough scope to address this. -- (talk) 18:44, 27 September 2008 (UTC)

Bad example - only tells half the story[edit]

Under Criticisms: "company X may have $1 billion of outstanding debt and $10 billion of CDS contracts outstanding. If such a company were to default, and recovery is 40 cents on the dollar, then the loss to investors holding the bonds would be $600 million. However the loss to credit default swap sellers would be $6 billion." This statement of the loss to the CDS sellers ignores the CDS coverage that virtually all these sellers have against loss. I believe the net loss is still only $600 million. The whole reason that $10 billion of CDS contracts are outstanding is that each CDS seller is likely to turn around and purchase another contract for their own coverage. Yes, in case of a default, somebody is going to lose $600 million, but it its't going to be multiplied 10 times after all these insurers cover each other. If I'm wrong, then this section needs citations that I can go look at, which show why the net loss gets magnified. I believe that it's only true in the case when everybody defaults: the original bond seller and all the sellers of the CDS contracts. And even if that happens, I believe the losses would be limited to unrecoverable bond debt PLUS whatever CDS premiums were paid by the buyers. Furthermore, the $10 billion of CDS contracts aren't all outstanding to the company that issued the bonds - they're outstanding to many other parties in addition to some held by that company. I'm'a change that. -- (talk) 17:22, 28 September 2008 (UTC)

Perhaps someone could add the results of the Lehman auction to illustrate a real world example. Also might be interesting to illustrate the problems caused by subordiated bonds recovering more than senior debt as in the case of Fannie and Freddie. —Preceding unsigned comment added by (talk) 16:38, 10 October 2008 (UTC)

Better introduction needed[edit]

The introduction should be written in such a way that it is intelligible to the non-specialist. Right now it reads like a legal contract. A bit of plain English in the body of the article would be welcome as well.Wwallacee (talk) 08:04, 2 October 2008 (UTC)

Thanks for the input. Have a look at the opening sentence now. Please tell us what you think. Zain Ebrahim (talk) 09:11, 2 October 2008 (UTC)

this page for others, this article is a botch-ups. Let someone else have a go, they may do a better job! —Preceding unsigned comment added by (talk) 06:30, 3 October 2008 (UTC)

First paragraph, Wiki Fascism or just an Ass?[edit]

I added a simplified first paragraph, after numerous comments about the unintelligible opening of this subject. Someone is deliberately making an essentially simple subject unintelligible to the ordinary person, is this what Wikipedia about - I think not. In essence CDS's are analogous to insurance. Taking out an "insurance policy" on an investment, that will pay out if that investment looses money. The investment can be almost anything, the "insurance policy" (CDS) offered by a fool who thinks he understands risk, in an "ever up" market. As anyone can see, in a downward market there is a $13 trillion pack of card, ready to tumble into dust. Much like World Trade Centre 1,2,and 7. Except we are talking about BIG money, and many more lives (suicide and family breakups)[5].

A very popular UK journalist Jeremy Clarkson (for those 300,000,000 who watch Top Gear or read his London Times column) wrote an interesting London Times newspaper article [6] ridiculing descriptions of CDS's, after he found his money had been invested in one collapsed bank (UBS), being offered to switch it to another (AIG). His article ridiculed the sort of technical garbage found in this article. This is a man who hob knobs with hedge fund managers, as per other article he has written over the years. It is quite valid to go into the technicalities, but anyone wanting to learn about such subject would be WELL ADVISED to avoid Wikipedia. —Preceding unsigned comment added by (talk) 05:45, 3 October 2008 (UTC)

In essence, a Credit Default Swap can be thought of as a type of "insurance" taken out when making an investment. The "insurance premium" is paid to a third party to protect the buyer of the investment should the original investment lose value. However, CDS's are not considered insurance for regulatory purposes.

CDS's are made between counterparties. The issuer of the CDS calculates the risk they carry and charges a ongoing fee. The original issuer of the CDS derivative may pass on part or all of the the risk to others, making it difficult to know who holds the obligation, should the original investor see a loss on their investment. Also see Derivative (finance), rating agencies and hedge. A more complete explanation follows.

Firstly, please calm down. I don't think your opening section is a good one - starting out by describing a CDS the way you did as a type of insurance is poor for two reasons:
  • It doesn't imo give the reader the correct understanding of what CDSs are. Remember, neither counterparty needs to have any exposure to the reference entity, and
  • you didn't include a reference. WP:V is possibly one of the most important rules here.
Okay, let's look at your first paragraph now. Please have a look at WP's explanation of how the lede shuold look. The opening sentence should provide to a lay reader an answer to the question "What is a CDS?". Saying what it is "in essence" is therefore inappropriate. Currently, the opening sentence does answer this question. If you can think of a way to make the sentence more readable, you're welcome to do so.
With respect, your second paragraph is very likely to confuse a lay reader. You use several terms without defining them and I cannot imagine someone making their way through that with full comprehension of its intent.
Please note that I'm not saying that the current lede is great, it clearly isn't. But it fits closer with WP guidelines than your recommendation. I'd be quite open to attempts to improve the current opening section. Zain Ebrahim (talk) 08:14, 3 October 2008 (UTC)
With respect CDSs are basically insurance contracts. Ted Seides of Protege Partners , who anticipated the current crises in his 2007 paper "The Next Dominos: Junk Bonds and counterparty Risk" says that Credit Default Swaps closely resemble insurance contracts. From a low level operational perspective there clearly are substantial differences, but from an commercial perspective CDSs are effectively a form of insurance. Comparing them to insurance in the opening sentence gives the casual reader something to latch onto and helps make the rest of the article easier to understand. FeydHuxtable (talk) 18:12, 2 November 2008 (UTC)
CDS's are not insurance contracts so comparing them to insurance in the first paragraph is incorrect and misleading. (talk) 13:03, 3 November 2008 (UTC)
Your edit of the opening paragraph earlier today looks good 75. As long as we have the word insurance in there. When describing a difficult concept for the general public it useful to make comparisons with the familiar. CDS are frequently described as either closely resembling insurance or even as just plain insurance both by journalists and industry insiders. I’ve also expanded the history section to make it clear in plain language that they arent always used for insurance purposes. FeydHuxtable (talk) 18:15, 3 November 2008 (UTC)

I don't understand why you think my addition to the "lead" was likely to confuse a lay reader when clearly yours many attempts certainly has done. The terms I used hardly require defining unless the reader is below 12 years of age, but then most kids are more interested in candy than understanding CDS's. You define Wikipedia guidelines as if they are set in stone, they are not. No wonder your continual revamps are such weasel words. If someone want to understand what a CDS is, legal / technical jargon is not going to help. There are times when describing something, requires a loose analogy, "to get the ball rolling" (See what I mean - England is my country, England invented the English language!). Many many popular commentators refer to CDS's as a type of insurance when explaining their technicalities (I won't bother reference that statement).

I find it very sad that many people may be looking to Wikipedia to find out what a CDS is, and why CDS's are imploding the world economy, and bankrupt many citizens. All they find is this unintelligible rambling. Just look at the comments in this section, and these are people who have a feel for this subject. There is no need to drown Wikipedia in technical legal definitions, leave that to the corporate backed systems that got us into this mess. —Preceding unsigned comment added by (talk) 17:40, 7 October 2008 (UTC)

For me the problem was that the definition, which I couldnt understand, was not followed immediately by an example. Every definition should be illustrated by an example. The article contains good examples, but they come much later, too late, I would say. Actually, a CDS can easily be understood by anybody just from one example, without even the need of a definition. —Preceding unsigned comment added by (talk) 15:18, 27 October 2008 (UTC)

CDS for the Complete Idiot[edit]

In the early nineties, a Credit Default Swap product was an insurance policy on investments. Around 2000, a bipartisan congress passed a law to prevent regulation of CDS transactions.

CDS transactions became a form of gambling when CDS products were purchased by people who did not have investments in the items being insured. It was like me buying a fire insurance policy on your house.

Hedges were used by people who bought and sold CDS products so they were not on the hook for the pay off. Example: I buy CDS from company A for $100 fee and sell an equivalent CDS to company B for a $200 fee, making me $100 at "no risk".

Unregulated leverage allowed the CDS sellers to sell products without enough reserves to pay off obligations. Risks were hidden from public view. Hedge funds helped to propogate the hidden risks.

Source: This American Life, episode 365 --jwalling (talk) 20:09, 4 October 2008 (UTC)

60 minutes, Wall Street's Shadow Market, October 6, 2008 has a simple "idiot's" definition from Prof Michael Greenberger at around 4 mins 50 secs.
"A contract between two people, one of whom is giving insurance to the other that he will be paid in the event that a financial institution or financial instrument fails"
It's a biased piece in as much as the whole video has a negative tone towards credit default swaps but I think including a layman's definition, perhaps somewhere in the definition section after the lead, might be a good idea. Ha! (talk) 19:56, 6 October 2008 (UTC)

Rewriting the lead[edit]

I made yet another stab at rewriting the lede. It probably needs another few lines, and a few more references, but essentially it's accurate and unambiguous. Edward Vielmetti (talk) 04:51, 6 October 2008 (UTC)

Yes, this is much more readable while it still maintains accuracy. I like it. I was just wondering if we could replace "specific credit event named in the contract" with "specified credit event". The former seems tautologous. Zain Ebrahim (talk) 11:45, 6 October 2008 (UTC)
Updated that one sentence in the lede. We need at least two more sentences there, one that ties this instrument to current events, a second which links to an additional section to be written on risks associated with inability to fulfill terms of the contract. Edward Vielmetti (talk) 15:48, 6 October 2008 (UTC)

Hooray! It is starting to look better! I think the first paragraph should end at ...for example bankruptcy or restructuring. This gives a reasonable and simple explanation, as an opener.

The next paragraph can go on: The associated instrument does not need to be associated with the buyer or the seller of this contract.[1] though needs slightly better explanation, and clean-up (2 x associated), and could start with "Technecially", to qualify the technical aspect of the sentence, and the fact that it is still a little bit gobbledygook.

The third paragraph works well, but again needs slightly more detailed explanation and perhaps the word "a simple form of insurance", and the last line is a little obtuse "US Commodity Futures Modernization Act of 2000 specifically barred regulation of these trades." does this mean the trades were made illegal, or just unregulated?

Originally used as a simple form of insurance against bad debts, these instruments became a tool for financial speculation when the US Commodity Futures Modernization Act of 2000 specifically barred regulation of these trades. —Preceding unsigned comment added by (talk) 17:09, 8 October 2008 (UTC)

single-name ?[edit]


In Credit default swap#Operational issues in settlement I red-linked and then tagged "single-name" with clarifyme. Does it mean counterparty risk (also not clearly explained in wikipedia), for example in the sense that the single counterparty (say another bank) in a single transaction may fail to settle the transaction? Or in the sense of a single mortgagor defaulting? I found it mentioned here in this google-accessible book:

Pricing and Hedging Interest and Credit Risk Sensitive Instruments
By Frank Skinner
Published by Butterworth-Heinemann, 2004
ISBN 075066259X, 9780750662598
288 pages

on page 275: "A single name credit derivative is one in which the credit risk of just one entity is traded" -84user (talk) 14:40, 6 October 2008 (UTC)

Thanks for the clarification of "Single name (only one reference company)" from [7]. That makes sense in the context of CDSs in the article. It seems that single-name probably has that meaning in other contexts too, I saw "single-name exposure" in several Moody's and Standard & Poor's rating reports and had wondered what they meant. This German article suggests translating it to Kontrahentenrisiko which is "counterparty risk" in English, which also makes sense. -84user (talk) 16:21, 6 October 2008 (UTC)

single name exposure[edit]

thanks for noting this; I think this should be a section in the credit risk article, or perhaps it needs its own.

some quotes and citations:

a source:

The Handbook of Structured Finance By Arnaud de Servigny, Norbert Jobst, Norbert Josef Jobst Contributor Arnaud de Servigny, Norbert Jobst Published by McGraw-Hill Professional, 2007 ISBN 0071468641, 9780071468640 785 pages

says on p 18 that single name exposure may be

  • repetition of a given corporate name in numerous portfolios
  • presence of the same server in multiple deals
  • high dependence on the cash flows generated by a single entity

this is contrasted with "pool exposure". note that some part of the fiction of credit derivatives is the notional independence of the underlying instruments, and the more single name exposure you have, the less this fiction stays true.

an article on the topic:

also note that the more mergers and acquisitions you have, the more you get single name exposure.

also also note that in the world of computer networks the similar concept is route diversity, and you get similar sorts of unpredictable systematic shocks when get you things like an earthquake wiping out a bunch of "diverse" routes that all happen to go through cables that go through one part of the ocean floor off Taiwan.

Edward Vielmetti (talk) 17:07, 6 October 2008 (UTC)

"Single name" in the CDS context means purely that there is one single reference entity. This distinguishes such a contract from multiple-name (e.g. basket or portfolio) or, especially, index trades (e.g. on iTraxx or CDX indices). It has nothing to do with counterparty risk.--DerivMan (talk) 23:16, 10 October 2008 (UTC)

Better lede, but let's illustrate it[edit]

I see that the current opening sentence of this article explains the concept that much better. For a subject so much in the news of late, this is good.

However, I have an idea. I'm thinking of sitting down with Inspiration tonight and making a simple diagram to use in the lede. Anybody else for this? Daniel Case (talk) 18:16, 7 October 2008 (UTC)

Yes please do. What kind of diagrams had you in mind? Personally I would like to see one that links house loans to CDSs. Maybe one that shows the relative size (maybe pie charts?) of these big numbers I see in pages 5 and 3 of 2008-115a.pdf below: "Net current credit exposure for U.S. commercial banks decreased $59 billion, or 13 percent, in the second quarter to $406 billion." (does not seem too bad) and "The notional amount of derivatives contracts held by U. S. commercial banks in the second quarter increased by $1.8 trillion, or 1%, to $182.1 trillion." (so large?) -84user (talk) 08:42, 10 October 2008 (UTC)
There is no link between home loans and regular CDS. (Well, all these thing are linked somehow, but no direct link.) There is a link between home loans and CDS on ABS, and the ABX index, because those are CDS on asset-backed securities (or an index of them in ABX case), where the asset-backed security is essentially a pool of mortgages. But that's a different market to regular corporate CDS.--DerivMan (talk) 23:21, 10 October 2008 (UTC)

No, no. I want to do a diagram that illustrates how one works, apart from anything related to the current situation. Daniel Case (talk) 02:30, 23 October 2008 (UTC)

I think such a diagram would be quite useful. Are you thinking something like the ones we see in textbooks with a block for A (buyer) and a block for B (seller) and a block for C (ref ent) and arrows from A to B (regular payments) and an arrow from B to A (contingent claim upon C's default)? That would be quite helpful - go for it! Zain Ebrahim (talk) 15:40, 23 October 2008 (UTC)
Yes, exactly. Daniel Case (talk) 08:56, 15 November 2008 (UTC)

History of these instruments[edit]

It's missing, and if we had a good section about it it would illuminate the issue.

Some data I'd expect to see:

  • size of market per year over time
  • origin story of the first ones
  • key papers in the field describing and valuing these
  • key simplifying assumptions in the analysis (and how they go wrong)

I'd like readers to be able to decode statements like this one from Accured Interest:

In fact, selling CDS protection in consort with owning a LIBOR floating asset is exactly like being long a 5-year FRN (if you ignore things like financing costs). Think about it, with the 5-year FRN, you'd get paid LIBOR plus some spread so long as the credit doesn't default. If it does default, you suffer the difference between par and the recovery rate. The CDS/LIBOR combination has exactly the same payout structure. For that matter, selling protection is also very much like buying a 5-year fixed corporate and hedging with a 5-year LIBOR swap. You wind up just collecting the spread. For this reason, the CDS should have a similar spread as cash bonds when compared to LIBOR swaps. —Preceding unsigned comment added by Edward Vielmetti (talkcontribs) 13:56, 9 October 2008 (UTC)

I agree completely with the need for an addition of a History section.
I also agree with the recent editing out of the more negative comments about CDSs in the intro, but think that we will likely need to explore this issue in more detail elsewhere in the article.Duedilly (talk) 15:35, 9 October 2008 (UTC)
Good resource: VermillionBird (talk) 20:09, 9 October 2008 (UTC). To expand, the previous is the "OCC’s Quarterly Report on Bank Trading and Derivatives Activities Second Quarter 2008," which has some useful and interesting information including historical values (100% annual growth rate from 2003 to 2007) and other facts (three largest dealers hold 92% of contracts and 5 largest hold 97%). VermillionBird (talk) 02:41, 10 October 2008 (UTC)
I edited out the reference to Blythe Masters having invented CDS (and CDO's). She was certainly around, but it's inaccurate to say she invented them. The reference did cite an article but that article stated it without sources and was clearly written by someone with no knowledge of the product.
I also deleted the negative comments presented as fact. If someone can write a reasoned, accurate and balanced summary of the recent criticisms of CDS that should be included in the criticisms section.--DerivMan (talk) 21:28, 9 October 2008 (UTC)
I agree fully with Derivman's removal of the note that Masters created CDSs and CDOs. If someone can find a reliable source indicating so then I'd be glad to include it in the article. The writer of that article doesn't seem to have had a thorough understanding of these contracts nor does he seem like the kind of journalist who researches his work properly.
Here's the ref. Now compare that to the article as of Feb this year. If the guy who wrote that article didn't rip wikipedia off verbatim then that has to be a coincidence of note. Btw, our GFDL requires that we get credit for our work - someone should send that guy an email. Zain Ebrahim (talk) 09:53, 10 October 2008 (UTC)

Auction history[edit]

I agree we need more on the "History of these instruments", and would like to see at least a table showing the size of market over time. I just added the stub section Credit default swap#Auctions hoping to fill it with a short table of the major auctions, but I found (being a complete newcomer to CDSs) a dearth of information. I looked at the Bank for International Settlements ( but could see nothing on past and planned future auctions. There's meant to be one today. Where is it described? Anyway I hope others can flesh that section out. -84user (talk) 08:20, 10 October 2008 (UTC)

This section should be headed by a big fat pointer to Since the wide spread adoption of Big Bang and Small Bang protocols CDS auctions are held for almost any larger credit event and these auctions are binding for all participants of small and big bang. —Preceding unsigned comment added by (talk) 12:43, 2 August 2009 (UTC)

Origins and early history[edit]

The first, large scale single name trades that I saw were in Italian government risk (there was a tax reclaim for non-Italian investors with a risk that was generally mispriced) - executed by Morgan Stanley and other investment banks in around 1993. But the documentation was weak. The first single name CDS trades that were recognizably ancestral to the current product were executed by Bankers Trust shortly thereafter. They were also doing first to default baskets on Japanese bank names in early 1994, as I recall. At Chemical Bank we managed to do CDS trades in 1994 (with no input from J P Morgan).

By the way, the earliest collateralized loan obligations are archived on Google News from 1985; the first use of credit derivatives in a portfolio CLO is supposed to be the Glacier Finance trade by SBC Warburg Dillon Read (International Financing Review 6 September 1997); the first public Bistro deal by J P Morgan was months later (International Financing Review 20 December 1997), so I suspect the main innovation by J P Morgan was the super senior swap in its Bistro structures.

I'm sorry I don't have really cool citations for the early history of the single name CDS apart from my memory, but if someone has access to archives of "Derivatives Week" then there's a reasonable chance of finding relevant material there. Paulkozo (talk) —Preceding undated comment added 05:14, 22 January 2010 (UTC).

Derivative Exposure[edit]

Interesting blog regarding derivatives [8]

Credit default swap exposure:[9]

OCC's Quarterly Report on Bank Derivatives Activities [10]

OCC’s Quarterly Report on Bank Trading and Derivatives Activities Second Quarter 2008 [11]

A Good article a Rense [12]

—Preceding unsigned comment added by (talk) 04:23, 11 October 2008 (UTC) (I replaced Sinebot blurb 84user (talk) 13:06, 12 October 2008 (UTC))

How to explain Credit default swaps?[edit]

I am trying to improve my understanding of these CDS so that I might make improvements in either text or diagrams on the above article. Can an expert comment on this following fictitious example?

Company C wants to borrow a million dollars to develop and market a new radio. Bank B agrees to give C a loan, the credit instrument, to be repaid in five years.

Bank B wishes not to risk losing all that money (because it would then be unable to repay its depositors), so it makes a contract, the credit default swap, with Insurer S. Bank B will pay S annual premiums for five years. In return S will, in the event that Company C fails to repay the loan, pay Bank B the money owing from the outstanding loan. In the event that Company C fails, Bank B must also give the credit instrument (the loan) to Insurer S, so that S can possibly recover some part of the loan (from what remains after the liquidation of C). Alternatively if Company C does not fail, then after five years C will repay the loan to Bank B, and Insurer S will no longer have the potential liability of paying out. In this case, Bank B will have paid a stream of premiums and S will have earned that same stream.

I believe this describes an insurance use of a CDS and ignores the speculative use where Bank B buys a CDS without having any loan to insure.

Here are my questions. Some answers I suspect but would not like to assume.

  • Is this CDS an instrument "made" by the seller and passed "over the counter" to the buyer in exchange for a complementary contract that agrees to pay the annual premiums?
  • Does the seller require sight of the credit instrument that is being insured? And is it marked on the CDS in some unique way? If not, what prevents S from selling multiple CDSs for the same loan? Is it possibly true that the legislation allows this latter case?
  • How do seller and buyer keep a record of them? Are they only recorded by the two parties or are they also registered somewhere else?
  • Must the seller keep sufficient capital in reserve to pay the buyer? What is this reserve ratio, if any, or is there no regulation at all?
  • Would a bank ever sell its CDS if Company C still owed it money from the loan? I guess not, unless another insurer, X, offers a cheaper insurance (maybe C's credit rating improves, or X wishes to take a greater risk). Does this happen?
  • A difficult political question: why have the US and UK financial leaders said practically nothing about CDSs? Are they not as big a problem as is made out?

That ends my questions on the insurance use of a CDS, but I am still puzzled as to what happens to all those CDSs that were sold and bought speculatively (without the buyer holding a credit instrument).

For example, I occasionaly see comments (on wikipedia and on BBC blogs), hinting that (a) a CDS sold without adequate reserve should be deemed illegal and that (b) a CDS unattached to its physical credit instrument should also be deemed illegal (in the sense of treating them as unenforceable gambling debts I suppose). I am very curious if this has been discussed in any serious depth.

I welcome any light cast on any of the above! -84user (talk) 14:10, 16 October 2008 (UTC)

  • These instruments, in the United States were specifically deregulated in the Commodity Futures Modernization Act of 2000, (passed as an un-debated amendment to a budget/appropriations bill in a lame-duck session of Congress, in the last days of the Clinton administration) -- and CDSs are specifically defined as not insurance--hence not subject to U.S. state insurance laws. State laws on insurance (because of a couple of hundred years of experience with insurance company defaults) are very specific about what practices may be permitted in insurance contract. The linked article about the law is very incomplete as of this date. Generally the CDS market industry follows standard contracts promulgated by the International Swaps and Derivatives Association. Those contracts require participants to put up collateral based on the counter-party's credit rating. American International Group, for example because of its previously outstanding credit rating, did not have to put up collateral, or minimal collateral for its contracts, and when its credit rating was reduced, suddenly it needed billions of dollars to put up as collateral for its credit-default-swap counterparties. Because of the non-regulatory stance of the Federal law, the two parties can agree to whatever they want to--there are no requirements, but there are customarily many aspects of these standard contracts that agree to the kinds of "requirements" you ask about. The Federal law on the topic is rather likely to change in the coming year or two, after the new Congress arrives in Washington.
    -- Yellowdesk (talk) 02:08, 17 October 2008 (UTC)

Are collection agencies using credit default swaps?[edit]

When a collection agency buys a defaulted credit card account from a bank, can that be considered a CDF? Are they insured against that account not being paid off, when the bank has determined that it's unpayable? If that is the case, could it also be considered insurance fraud and/or be subject to racketeering laws? --Coyoty 23:37, 26 October 2008 (UTC)


  • This article needs a complete overhaul. Many sections repeat earlier sections and the whole structure needs rejigging. Furthermore the tone of the article is heavily biased in favour of the description of CDS's as 'insurance'; which is widely discredited by those familiar with the subject. I will be making a number of edits over the next few days; please discuss any disagreements you may have here. Thank you. —Preceding unsigned comment added by Sexual harassment panda (talkcontribs) 21:15, 25 October 2008 (UTC)
    I agree that we should not give the impression that a CDS is an insurance contract - it can be used to hedge credit risk but it's not an insurance contract (because an insurance company will will only insure you against an insurable event). Perhaps we should devote a section to this. My efforts to remove a rewrite of the lede describing CDSs as insurance was met with considerable hostility from an IP editor above. Zain Ebrahim (talk) 08:33, 27 October 2008 (UTC)
    Yes I will remove that quotation. Who the **** cares what some guy from the CTFC said? Furthermore the first paragraph describes a CDS as a 'swap', and the second contains a quote saying that they aren't swaps! (talk) 09:25, 27 October 2008 (UTC)

I think we should switch around the two definitions of a CDS. The current lead is more technical while the second is a more simplified introduction and would be a better starting point for someone new to the subject who probably doesn't know what a swap is. (talk) 11:38, 28 October 2008 (UTC)

I reverted you because (as you can see above), many people wanted a more understandable lede that still conforms to the guidelines set forth in WP:LEDE. However, over the past two weeks, several editors made the new lede more incomprehensible (and inappropriate) than the older one. I see I've been reverted so I won't rerevert but the lede as it stands is at least correct.
We really don't need to shove Swap (finance) in the face of someone trying to understand these things. Credit derivative is better but perhaps we should just say "bilateral contract" or even "contract". Me, I'm just going to wait for the crisis to get boring and then come back here to get this to GAC status. Zain Ebrahim (talk) 14:19, 28 October 2008 (UTC)
I agree the lead needs fleshing out further but the current statement is definitely the better way to start. The current crisis has little to do with cds's (and the article must make that clear) but they are still one of the most important financial products and require a good article. (talk) 15:10, 28 October 2008 (UTC)
Yeah I was saying that when the crisis is over, we might stop getting so many editors adding pointless references to it. Zain Ebrahim (talk) 11:57, 29 October 2008 (UTC)

Criticism Section[edit]

Is the Buffett quote really necessary? There's nothing specific in there about CDS; that stuff should be in the full article on derivatives. (talk) 11:27, 29 October 2008 (UTC)

I always thought he was talking about CDS's when he said that. But a (very) quick google search indicates he was talking about derivatives. The Berkshire annual report (from the references section) isn't opening for me - what does that say? If it doesn't mention CDS's specifically, it shouldn't be here. Zain Ebrahim (talk) 12:01, 29 October 2008 (UTC)
Just had a look - "Charlie and I believe Berkshire should be a fortress of financial strength – for the sake of our owners, creditors, policyholders and employees. We try to be alert to any sort of megacatastrophe risk, and that posture may make us unduly apprehensive about the burgeoning quantities of long-term derivatives contracts and the massive amount of uncollateralized receivables that are growing alongside. In our view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal." So about derivs in general not credit derivs. Worth some discussion on the counterparty risks inherent in the cds mkt though. (talk) 12:46, 29 October 2008 (UTC)
I dunno, I think it would be better to leave that at Derivative (finance)#Criticisms where it's already mentioned. And maybe link to that section from the criticisms section here (something like "See Derivative (finance)#Criticisms for a more general discussion of criticism of derivatives."). Buffet was specifically referring to derivatives after all. Fwiw, Zain Ebrahim (talk) 13:29, 29 October 2008 (UTC)

I believe the tone of the final paragraph of this Criticism section is inconsistent with the rest of the section, ie it sounds more like a financial advisor giving advice than an encyclopedia entry, but I'm not knowledgeable enough about CDSs to feel confident editing it. It is true the entering a CDS transaction gives you counterparty risk, but bear in mind that it is also possible to hedge this risk by buying CDS protection on your counterparty! Furthermore, it is not strictly true to say that profit and loss is recorded without any money changing hands since positions are marked-to-market daily and collateral will pass from buyer to seller (or vice versa) to protect both parties against counterparty default. It is also worth noting that Buffett seems to have since changed his stance on derivatives since he made this statement, since in October 2008 Berkshire Hathaway was forced to reveal to regulators that it has entered into at least $4.85 billion in derivative transactions.Keisetsu (talk) 03:53, 13 December 2008 (UTC)

I agree with the above criticism regarding the paragraph with "bear in mind". This sounds like some guy trying to defend credit default swaps from negative publicity. What is this "bear in mind" stuff? We should just delete the thing because of non neutral pov. —Preceding unsigned comment added by (talk) 07:09, 30 December 2008 (UTC)

Thirded. First, it doesn't read well. An exclamation mark? Really? Secondly, the suggested course of action in light of counterparty risk seems a bit Martingale-esque . Perhaps someone more financially gifted might want to give it a crack? MasonicDevice (talk) 18:53, 23 February 2009 (UTC)

Let's (rather let you) start again[edit]

This entry should be scrapped.

I came here to try to learn more about credit default swaps. This page is no help unless you already know what they are.

It is so filled with insider jargon as to be unusable by an outsider. It would be nice if someone could write in plain English (to be translated into plain other languages) exactly, concisely, cogently what credit default swaps are.

I suspect this is an impossible task as the people who created the mess don't appear to have understood what they were doing so how are they going to explain it to anyone else.

Meanwhile this whole entry adds nothing to wikipedia or its users as it is totally incomprehensible.

A phrase from my schooldays occurs - "bullshit baffles brains". Well, this seems to be the former, it doesn't baffle my latter but it does annoy me because it doesn't add to knowledge. —Preceding unsigned comment added by Cannonmc (talkcontribs) 14:53, 1 November 2008 (UTC)

I agree completely with Cannonmc, the opening paragraph needs to be revamped once again. In early October 2008 this paragraph was very confusing for the novice (which I am), then it was simplified (somewhat) in late October, and now in November here we are back again at a state of confusion. I understand that traders, insurers, and bankers can't resist slipping into their professional slang, and I have no problem that a good part of the rest of the article delves deeply into mathmatical functions and probability stats. But, I would appreciate it if the opening paragraph were reverted (or rewritten) once again in strictly non-professional jargon. Thanks to anyone up to the task. Tell someone (talk) 03:31, 13 November 2008 (UTC)

I agree that this article needs to be re-written. I am a professional in the field of CDS and find this article confusing. Additionally, there is no mention of some key terms to a CDS contract, such as restructuring clauses and "cancellability". My opinion is that this article needs to be organized into (1) Introduction, (2) Terms of a CDS Contract, including Tenor, Restructuring and Cancellability, (3) History which should note importance of the Conseco default, the Anderson default and the AMD Loan default, (4) Pricing which needs to be expanded as there are many ways of pricing a CDS, (5) Criticism and (6) Involvement in financial crisis. I may be an expert in CDS, but I am a newbie at Wikipedia, so I will try to improve upon this article, specifically by adding a Terms section that describes some of the important terms of CDS contracts and possibly assisting on explaining CDS in plain English in the Introduction (although this is difficult as CDS are flexible and can be used many ways, I have explained it over a dozen times to my mother and I still get blank stares). But that is just my two cents. Terets (talk) 11:31, 7 December 2008 (UTC)

I hope you are inspired to do it. Remember, Wikipedia encourages Wikipedians to WP:BEBOLD--gargoyle888 (talk) 12:55, 7 December 2008 (UTC)
Well, I was bold and my addition was deleted by Campoftheamericas with the note "no deleting of information please", but I did not delete information, I mostly just reworded what was there to make it more accurate. The description section is ridddled with inaccurate information. CDS contracts are not on the bond or loan level, they are on the entity/capital tier level. The last paragraph of that section is also a bit inaccurate and misleading as that is not really how they are quoted in the market. What I replaced it with was much more accurate as they are quoted in spreads below 1000bps and upfront for ones that trade over 1000bps (CDS were quoted exclusively in spread in the beginning, so some documents which are just a few years old will not mention upfront pricing). Also the example was a bit confusing as it talked about the CDS terminating and then some other stuff and then doubled back around to settlement which is not chronologically correct and can confuse people new to CDS. Can we have a discussion on this so that this article can represent CDS more accurately? I feel there are many areas of this article that are not up-to-date as the CDS market changes constantly.--Terets (talk) 22:11, 20 December 2008 (UTC)

Still confused about credit insurance[edit]

I see references in the media to "credit insurance", "credit default insurance" and bond insurance, for example in this New York Times article. At first I thought these were colloquial terms for credit default swaps, but on further reading I now *suspect* they are talking of two kinds: the first two are really credit default swaps and the last is bond insurance. Our article on Credit insurance talks about "Trade Credit Insurance and Credit Life Insurance", but this does not appear to match how the New York Times uses the term. What am I surely misundertanding? -84user (talk) 15:53, 3 November 2008 (UTC)

At a quick glance, it looks like that article is referring solely to CDS contracts. Your instincts were good. Zain Ebrahim (talk) 16:13, 3 November 2008 (UTC)
My reading is the article is referring mainly to CDSs but also to traditional insurance . It mentions Amabac for example with is a traditional bond insurance issuer. 84user, most CDSs are on bonds but they can be on other forms of credit. With bonds the payout can be triggered by a default, but with some contracts by a downgrading of the companies credit rating. This latter type is most obviously suited to speculation , partly as dealers can help encourage a downgrading by short selling the companies stock. Its a messy old game CDS trading! FeydHuxtable (talk) 18:23, 3 November 2008 (UTC)
The key difference between CDS and bond insurance is that bond insurance is attached to the actual bond whereas a CDS contract can be bought or sold by anyone who can find a willing counterparty regardless of whether either party has a position in the underlying bond. In the vast majority of cases, when you buy an insured bond, the insurance--generally paid for the the bond issuer--comes attached to the bond and an't be traded separately. When you buy protection under a CDS, you don't have to own the bond you're buying protection on. This makes them more like an investment and less like insurance. In fact, the vast majority of CDS are bought by investors who don't own the underlying bond. They are simply speculating that the price of the CDS will rise or fall.
Eric Dinallo, the NY state insurance commissioner referenced in the article, suggeted recently that his agency should regulate the CDS market because CDS is similar to insurance. He backed off when somebody determined that a CDS is only like insurance when the buyer of protection owns the underlying bond, which is almost never the case.
Oh, and one more thing. The credit event trigger on the vast majority of outstanding CDS is a default. CDS where the credit event is a downgrade are very uncommon. Bond Head (talk) 01:50, 4 November 2008 (UTC)

Nearly all people with a household insurance have insured risks they usually do not take. You can also sign a health insurance for your children or even other adults. So it is possible to bear somebodys else's risks with an insurance. You will have a hard time to make a real distinction between CDS and credit insurance. But it is of course a great economic advantage to banks not to be exposed to tough insurance regulations stipulating you have to save money to be able to make payouts in occurance of credit events (reserve for impending losses). — Preceding unsigned comment added by Rick AUT (talkcontribs) 15:38, 3 March 2011 (UTC)

Naming people?[edit]

Im not sure we should be "crediting" specific individuals with inventing the CDS. Having spoke with industry insiders Im fairly sure that Blythe was neither the one who first conceived this product or even the one heading up the team that developed it, although she was a leading member. Granted some articles from fairly reliable sources name her as the inventor, but I think she just gets singled out as for a banker she's relatively well known and interesting.

If we are going to name an individual we should try not to be unfairly negative. IMO crediting an individual with developing CDS is highly negative publicity as (rightly or wrongly) they are seen by many as a chief cause of the current financial crises. So I added a reference to the Criticisms section where Masters defends the CDS to present the other side of the argument. However if other editors agree its best not to mention Blythe I support these references being removed. FeydHuxtable (talk) 13:21, 6 November 2008 (UTC)

  • Crediting someone with creating CDS is incredible positive publicity. They're one of the most important innovations of the last decade. Oh, and everyone in finance knows that blaming CDS for the current crisis is a complete joke. (talk) 16:30, 6 November 2008 (UTC)
Alan Greenspan , until recently the world's most powerful man in Finance, has conceded CDSs and the lack of regulation on their use partly caused the crises. Granted many in Finance would agree with you and I have some sympathy myself which is partly why I added a reference defending the CDS. A key point here is this is a public encyclopaedia - recent high profile press and TV broadcasts mentioning CDSs have blamned the CDS, hence in the wider world the inventing CDSs is not something to boast about. Blythe is already highly respected within Finance, IMO she doesn't court wider publicity which is why I'll soon remove mentions of her name unless anyone objects, as stated its probably incorrect that she invented the product. FeydHuxtable (talk) 18:42, 6 November 2008 (UTC)
  • Not much about CDS in that article - seems like comments taken out of context to me personally. There should absolutely be stuff in the article about recent criticisms; so long as a balanced picture is given. And yes, doesn't make sense to say one person 'invented' the CDS; it's a simple concept so one person can't have been responsible for its wider acceptance IMHO. (talk) 00:44, 7 November 2008 (UTC)

I think it's fine to credit someone with inventing a method, as long as proof, in the form of Wiki-eligible citations, is provided. Controversial statements, such as those about Blythe, are a normal discovery during topic research. That's why the citation info is so important. Tell someone (talk) 03:48, 13 November 2008 (UTC)

Hi, In general I agree , but in this case if you compare the two citations in the conception section which name Blythe, the Guardian one where they’ve clearly been in contact with her directly suggests she was part of the team that developed CDSs , rather than the individual who originally conceived the idea. Given recent publicity a few individuals might regard the inventor of CDS most unfavourably, which is why I don’t think we should single out an individual especially when the best available sources seem to suggest that is incorrect.FeydHuxtable (talk) 19:48, 13 November 2008 (UTC)

Fiat Money[edit]

I moved the reference to this from Conception to the Description section. IMO its correct to suggest a link, but Im fairly sure the conception of this product was motivated only by a desire to create profitable instruments for JPMorgan, at worse if one takes a cynical view to create weapons for their completion with other banks. The developers would have considered practical matters concerning regulation, but not theoretical considerations relating to fiat money – IME even senior folk in finance rarely think in that sort of abstract terms. At best the link with fiat money may have influenced the legalisation of the product. FeydHuxtable (talk) 20:08, 13 November 2008 (UTC)

I've taken the liberty of deleting this altogether, as it appears to be random conspiracy waffle. (The wikipedian justification is that the claim is unsourced, and not NPOV). —Preceding unsigned comment added by (talk) 20:34, 13 November 2008 (UTC)
Thanks. Campoftheamericas , I agreed with you but 125.205 is justified in removing the addition alltogether, as the article you linked to didn't make a connection with CDS. For it not to count as Original Reasearch you need to find a Wikipedia:Reliable sources that explicitly suggests a link between fiat money and the CDS. FeydHuxtable (talk) 20:45, 13 November 2008 (UTC)

"Slightly misleading"[edit]

A sentence was worded like this: "CDS contracts have been compared to insurance, because the buyer pays a premium, and in return receives a sum of money if a specified event occurs. However, this is a slightly misleading comparison because the buyer of a CDS does not need to own the underlying security; in fact the buyer does not even have to suffer a loss from the default event." I took out "this is a slightly misleading comparison because" and someone put it back. I don't think it is the purpose of Wikipedia on its own to say that something is "slightly misleading." This has to be in a quoted source. I happen to agree it is misleading, but I don't think we are writing essays in which we say such things.--JohnnyB256 (talk) 00:30, 15 November 2008 (UTC)

Contrary to the anonymous editor's claim in his editing summary, the "misleading" language that he keeps reinstating is not stated in the sources of footnotes 2, 3 or 4. I'd like to see other editors voice their opinions on this subject.--JohnnyB256 (talk) 13:23, 15 November 2008 (UTC)

Fair enough. However CDS's are not the same as insurance, so comparing the two in the first paragraph is misleading, and attention should be drawn to this. What do you think of the current edit? (talk) 16:02, 15 November 2008 (UTC)
It's fine. The value judgment "misleading" is what I objected to. It IS misleading, but we can't say that unless we are quoting somebody.--JohnnyB256 (talk) 16:15, 15 November 2008 (UTC)


I agree that there needs to be a wider range of viewpoints on this. In looking at the citation, I see that they are predominately from industry related entities. I see few citations from academia or regulatory sources. These sources do exist in spades.

Regarding the Insurance Definition Hysteria... CDS's are a form of insurance (Per Webster: Insurance: a means of guaranteeing protection or safety). I have to ask why it is so important that CDS's not be viewed as a form of insurance? The best way for a layman to understand it is via things he is already familiar with. The point is to create understanding, right?

Racerxy (talk) 18:54, 10 January 2009 (UTC)

They're only insurance if you're using them to hedge a risk you have exposure to. If you're long a credit and you offset that by shorting the credit using CDS, then the CDS position is analogous to insurance. If you're not long the credit in the first place, then shorting the credit using CDS is just a speculative investment, not insurance. Bond Head (talk) 23:11, 10 January 2009 (UTC)

Sources seem fine to me - mostly FT articles (ie the press). Industry-related links seem to mostly be for factual data. (talk) 00:54, 24 January 2009 (UTC)


Is there a website where you can find current prices for CDS for the major companies and countries? MMMMM742 (talk) 14:05, 24 April 2009 (UTC)

I don't think it is easy to get these on the internet itself, but any bloomberg terminal would be able to give you some CDS spreads for most credits. Nishball (talk) 04:51, 9 June 2009 (UTC)

Some price information is now available for free on the Markit website, see Quote for the Most Liquid Credit Default Swaps. Nynva (talk) 18:56, 3 December 2009 (UTC)


The standard model for CDS valuation (well actually the new standard, since it is a slight variation of the JP Morgan Model) has recently been open sourced, see ISDA CDS Standard Model. —Preceding unsigned comment added by (talk) 12:52, 2 August 2009 (UTC)

Some references for the pricing models would be helpful - indeed "The second model, proposed by Darrell Duffie, but also by John Hull and White" would, without references, seem contrary to Wikipedia policy.Peter.edelsten (talk) 19:18, 29 October 2013 (UTC)


I curious about typical durations for a CDS. In particular, as I understand it, large amounts of money are tied up as collateral for CDSs issued before the 2008 crisis that now have much higher spreads. When does that cash free up? It seems like something the article should mention.--agr (talk) 15:10, 5 August 2009 (UTC)

Maturities up to ten years are traded most often, but there is no real restriction for tailor made contracts. Blahfasel (talk) 14:39, 22 August 2009 (UTC)

Five-year CDS are the most liquid (typically), but the collateral requirements are deal-specific. Assuming the deteriorating financial condition of the company to which the CDS pertains does not improve, then the collateral posted would be "freed up" after expiration. —DMCer 03:11, 29 October 2009 (UTC)

Criticism - Tightened Credit Spreads[edit]

Removed the following from Criticism section:

Credit default swaps lower the yield on bonds since owners of credit default swaps will accept a lower bond yield knowing that they have insurance on the default of that bond. This harms small investors unable to buy credit default swaps because bond yields are lower as bonds are priced with the insurance value of credit default swaps included.[1]

This criticism misrepresents the referenced material and is incorrect. If a bondholder hedges the credit risk of their position by buying CDS on the underlying bond, the counterparty (CDS seller) takes on that credit risk. The net exposure to the credit risk therefore remains the same and is transferred from the CDS buyer to CDS seller. Corporate bonds are not priced to include the protection of a CDS (they would be priced to yield the risk free rate if this were true).

The article referenced asserts that the demand for leveraged corporate credit risk exposure through CDO issuance caused an imbalance of sellers vs buyers of CDS protection on corporate bonds. The existence of more sellers than buyers forced CDS spreads tighter which forced bond yields down due to arbitrage opportunities. The notion that the existence of CDS on its own causes spreads to tighten is wrong because the net credit risk exposure remains the same regardless of how many CDS contracts are written on the underlying bond. The holder of that net exposure will demand adequate compensation for the credit risk. The criticism could be that the opacity of the structured securities hid the true credit risk from investors and therefore forced spreads to levels too low for the risk involved but this would be a criticism of CDOs, not CDS. —Preceding unsigned comment added by (talk) 22:41, 26 January 2010 (UTC)

Day Count Convention[edit]

As a data point CDS spreads are quoted with act/360 Day count convention. Therefore technically the examples are incorrect. - With a quoted spread of 500 Bp. on $10 Mio. protection buyer is going to pay a premium of 10000000 x 0,05 x 365/360 = USD 506944 (for a non-leap year) instead of USD 500000. However readability would suffer. How about mentioning this somewhere in a foot note? —Preceding unsigned comment added by Blahfasel (talkcontribs) 14:33, 18 April 2010 (UTC)

reporting requirements[edit]

I am new to the discussion page but have diligently been revising the CDS text.

A change was made to the last paragraph in the lead from: Credit default swaps are not traded on an exchange and there is no required reporting of transactions to a government agency. This lack of transparency is of concern to regulators as is the trillion dollar size of the market that may pose systemic risk to the economy. [cites to SEC testimony and journal article]

to: Credit default swaps are not traded on an exchange but all transactions are confirmed in the DTCC Trade Information Warehouse, and are subject to regulatory trade reporting requirements, just like any other derivative or security trade.

the reason stated for this change was that (Removed incorrect statement that cds do not have any reporting requirements.)

I have looked and feel the person who made that change Is incorrect. DTCC does have a info warehouse and in March 2010 agreed to let regulators have freer access to that data base. the DTCC press release is here: That is voluntary access by DTCC; it is not required by law, although there is talk by regulators to require it. see this FT article: I believe my statement remains true -- although I have no idea what "regulatory trade reporting requirement" encompass. As the FT article indicates, EU officials were in the dark about aspects of Greek CDS. PLus, I think the revision does not address that a) lack of transparency and b) sheer size, give regulators great pause. That credit default swaps are reported "just like any other derivative" may be true but it understates my point. However the existence of the Trade Warehouse is an important development worthy of note.

I plan on melding the two thoughts but wanted to give others a chance to comment. Web cites would be helpful so I can better understand your reasoning.

sincerely, ctk56

Ctk56 (talk) 02:21, 20 April 2010 (UTC)

I am reasonably certain you are correct. I am not aware of any regulatory mandate that requires parties in a CDS transaction to report their trades anywhere. In fact, this is one of the reasons why speculators in the credit markets prefer to trade CDS over, say, corporate bonds, which do have a trade reporting requirement. (There are other reasons, of course.) If I'm wrong, some please reference the cite. Bond Head (talk) 00:31, 21 April 2010 (UTC)
All investment bank trading desks report ALL TRADES to their regulators. For example in the UK (where I work) the Financial Services Authority receives reporting of all trades done, whether OTC or on exchanges. It is simply incorrect to say that CDS do not have reporting requirements. Now whether the regulators have the tools to interpret the reports is another matter....! (talk) 12:28, 25 April 2010 (UTC)
reply to that seems inconsistent with DTCC own press releases (march 2010) saying it will give regulators greater access to data base as well as commentary by IMF and CFTC(march 2010) citing need for more transparency. if authorities received reports of every trade, the market would be transparent. your thoughts? can you provide a url that supports claim?? thank you. Ctk56 (talk) 12:19, 26 April 2010 (UTC)
That may be true in the UK, but I'm pretty sure there's no similar rule in the US. Bond Head (talk) 01:04, 28 April 2010 (UTC)

excellent quality article i don't think it requires clean up.[edit]

it is very interesting and rich —Preceding unsigned comment added by (talk) 18:06, 30 May 2010 (UTC)

This is an obvious counterargument against CDS (that may need sources to be exposed)[edit]

It is probably against wikipedia policy as 'original research' to include it without sources though it's also common sense so I don't know it may be even possible to just add it (unless sources are found anyway,it's probably easy since it's so common sense). It's basically that: true, Credit Default Swaps' prices may reflect at least partly the real market in relation to a third party reference entity (e.g. a Country) but, what is obvious and common sense is that if the clients of such products have access to Media that overwhelm the reference entity (e.g. Soros VS little Greece) then the price may be manipulated. This is particularly easy in this case since the reference entity may be a completely separate party (seller or buyer distanced). --Leladax (talk) 15:44, 8 July 2010 (UTC)

It's insulting calling this product insurance in the article.[edit]

Neither of the parties - buyer or seller - has to have any personal risk whatsoever on the failure of a country. So a powerful propagandist can get on TV and speculate against a country for the benefit via CDS and neither of the parties buying or selling CDSes would have any personal risk involved when it goes to failure of the country. This is insulting, a scum and ultimately a casino mafio tactic with a good obscure name for deceiving the masses. -- (talk) 01:14, 4 August 2010 (UTC)

Insurance is still the best metaphor, for better or for worse. And there's really nothing wrong with speculating against a country. (talk) 01:08, 1 November 2010 (UTC)
It is definitely not insurance since you are being insured of nothing. You can be either the seller or the buyer of the product and have absolutely no relation with the target of the product, making it fair to call it marginally gambling. The paradox is by not calling it insurance they get away with several restrictions involving insurance but since its even more wild in character it should have even more restrictions. -- (talk) 21:16, 15 November 2010 (UTC)
I agree that insurance is not a good way to describe CDS. Credit default swaps are not insurance. But speculating on sovereign credits is definitely not "a casino mafia tactic" and is not intended to "deceive the masses." Bond Head (talk) 14:40, 1 November 2010 (UTC)

Authorisation and Regulation[edit]

Para 6 of the intro as it stands at 1 sep 2010 - Credit default swaps are not traded on an exchange ...... could create a misleading impression of the status of CDS. Their regulatory status is only implied. In Europe they were included in European 'Markets in Financial Instruments Directive 2004' and in UK Financial Services and Markets Act 2000 (Regulated Activities (Amendment No. 3) Order 2006) as recognised and regulated investments. Presumably there was also equivalent legislation in US?

So, something like - Whilst credit default swaps are not traded on a recognised exchange and there is no required reporting of transactions to any government agency, such instruments became recognised and regulated by Europe generally in 2004, UK in 2006 and USA in .... .

Just serves to clarify their legality slightly. What do you think?

CrackersJV (talk) 00:10, 1 September 2010 (UTC)

This part of the article will have to change, at least with respect to the US. The Dodd-Frank Act, once fully implemented, will result in a significant portion of the CDS market moving to exchanges or exchange-like trading platforms. Also, a large portion of the market will be subject to mandatory clearing. However, these provisions won't take effect until almost a year from now. Bond Head (talk) 14:44, 1 November 2010 (UTC)
Prior to 2000, it simply wasn't clear which federal or state agencies in the U.S. had jurisdiction over CDS (or derivatives in general), or if they were just like any other private contract. The vast majority of private contracts in the U.S. aren't directly regulated by anyone; the exceptions are really, really bad ones like agreements with unlawful restraints on competition (which are regulated under antitrust law).
There was some talk that naked CDSs should be regulated as a form of gambling but nothing came of it. The Commodity Futures Modernization Act of 2000 specifically deregulated derivatives, including credit default swaps (so CFTC couldn't touch them) and specifically prohibited the states from regulating them as insurance (which they otherwise probably would have had authority to do under the McCarran-Ferguson Act). That's one reason why no one was monitoring what was going on in the crucial period from 2004 to 2008. --Coolcaesar (talk) 06:21, 2 November 2010 (UTC)


From my understanding it is basically an insurance you pay for on a month to month basis to insure your stock(s) so that if you lose a lot of money on stock(s) the insurer will take the fall instead of you. —Preceding unsigned comment added by (talk) 03:41, 26 January 2011 (UTC)


Bully 1 and Bully 2 come together and make a deal that if Victim 1 died, Bully 1 would get $1,000. If Victim 1 survived, Bully 2 would get the $1,000. Am I correct in understanding this from the article? Can it be included in the article as an example? It appears the jargon about it, deep into Law and Finance talk takes away the obvious: this is not a common insurance since the "Victim" is not involved a lot of the time. It's 3rd party - a lot of the time - that has absolutely nothing to do with Bully 1 and Bully 2 doing the dealings. This is extremely dangerous for the stability of emerging markets and small economies and it should be stressed in the article of wikipedia. --Athinker (talk) 00:12, 22 March 2011 (UTC)

There is one major flaw and a whole lot of POV in your explanation. First the POV: The "Victim" is not necessarily hurt and the "Bully"s are not necessarily looking to hurt anyone. The major flaw is that the $1000 is one-sided, with a fee on the other side that is far less than $1000 and paid regardless of the outcome. Here's a rewrite:
A homeowner with less than stellar credit owes $100,000 to Institution A. If the homeowner's credit were better, A would be able to sell the mortgage to another institution. Homeowner's poor credit prevents this. So, A buys (in effect) insurance on the payments (the credit default swap) from Institution B and bundles it with the mortgage. Now the homeowner's credit is moot, as B's credit covers it. If the homeowner defaults, B pays the mortgage. In any event, A pays B a fee. If the homeowner does not default, B earns the fee. If the homeowner defaults, B is out the value of the mortgage (minus the fee they received). In either case, so long as B does not default, there's no problem.
B can cause problems by taking on too much risk relative to its asset base. This does not seem to have been the major problem.
In the current situation, the problem was incorrect risk assessment. If A didn't do its homework, it might be that the homeowner's credit was even worse than thought. As a result, the fee paid to B was too low relative to the risk. Think of it this way: a mortgage with a 1% chance of default should generate a fee of just over 1% to B. If B covers 100,000 of these, roughly 1,000 should default and B should come out slightly ahead (as the 100,000 fees should = 1,000 mortgages). If, however, the real risk is 2%, B could lose buckets of money. If the economy is good (housing values going up, low unemployment) the default rate is going to be low, such that B still makes money, even on the poorly evaluated mortgages. One housing prices falter or unemployment creeps up, though, the chickens come home to roost.
Due to the complexity of the issue, we'd need a very strong source giving an example before we could include it. (My explanation is simplified and other editors are likely to dispute various aspects of it, for example.) - SummerPhD (talk) 14:30, 27 April 2011 (UTC)

If you understand this article, you don't need it[edit]

Like so many Wikipedia articles, this has been written by authors that already know (or purport to know) what the subject is about. This is an article that is entirely useless for a layman (aka, ordinary person) who wants to know what a credit default swap is. Cannonmc (talk) 14:52, 8 April 2011 (UTC)

why is wikipedia so bad at financial articles?[edit]

on many, many articles, wikipedia does quiet well. on many financial articles, though, it appears that we have the 'too many cooks spoil the broth' effect. the article appears to be very, very disorganized, and written in very confusing language. am i wrong? am i just imagining things? Decora (talk) 22:52, 17 April 2011 (UTC)

You're totally correct. Unfortunately, all the people smart enough to actually understand this stuff (myself included) are too busy working to spend a week cleaning up these disorganized articles and rewriting them from scratch. --Coolcaesar (talk) 22:54, 17 April 2011 (UTC)
you don't have to be smart. all you have to do is care about your reader. everything else comes from that basic principle. i dont think this stuff is that complicated. I think Kurt Vonnegut once said that any scientist who can't explain what they are doing to a 7 year old is a fraud. Decora (talk) 23:17, 17 April 2011 (UTC)

four intro paragraphs[edit]

on this article, we have four, count them, four separate introductory paragraphs. I just have to ask myself, who wrote the last one? did this person not see that there were already three other paragraphs, saying almost exactly the same thing, already in the article? what was the point of adding that fourth one? did these people think they were improving the article? can someone explain this thought process to me? i am truly, truly baffled. Decora (talk) 23:17, 17 April 2011 (UTC)

Removed "Technical" tag[edit]

While it might have applied when it was added, the "too technical" tag seems unreasonable now. The layman can generally understand the subject from reading the summary. The article becomes more technical further down, but only gradually. Compared to the typical Wikipedia untagged article on math or science -- or cricket -- this one is a model of clarity. — J M Rice (talk) 18:13, 12 November 2011 (UTC)

NPOV Dispute- Not insurance[edit]

This section makes the case that CDS is not insurance based in large part on circular arguments (it isn't insurance because it isn't regulated like insurance) and on what seem to me to be very insignificant differences. It seems that this section is trying to convince people that it isn't insurance when, really, it essentially is. Please see the "credit default insurance" section of this talk page. I recommend that instead of insisting that it is not insurance, simply state how it is different from other insurance operations. And change the title of the section to something like "Comparison to insurance" or "Analogy to insurance." It seems to me that the purpose of this section is to convince people that CDS should not be regulated like insurance. Thanks for considering my comment. — Preceding unsigned comment added by (talk) 16:44, 25 April 2012 (UTC)

As no-one else seems to have commented since April I've changed the title to Differences from insurance. I've also removed the NPOV flag because the content does not seem biassed or circular to me, but feel free to reinstate it if I've not addressed your concern? Servalo (talk) 11:53, 14 October 2012 (UTC)
I concur with your revisions, although I should point out that our anonymous commenter above obviously has no idea what insurance actually is. Insurable interest is an essential component of insurance because it is what distinguishes insurance from naked gambling. This is one of the most basic ideas understood by everyone who actually brokers or underwrites insurance policies, or who adjusts claims for insurance companies. --Coolcaesar (talk) 18:16, 14 October 2012 (UTC)

Very basic introduction for the layman[edit]

---Here's a layman's explanation in everyday terms.

Alex gets a new bicycle for his birthday. His brother Bob wants to borrow it for a week, which Alex does not want to do; but their mother Martha makes him do it.

Alex says to Martha "Ok: But if Bob wrecks it, then you have to buy me a new one." Martha replies "Fine, if you'll wash the dinner dishes every night for the week."

Here Alex has done a CDS with Martha. The seller is Martha; the buyer is Alex; and the reference entity is Bob.

If Bob returns the bike safely, then Alex has lost a little by having had to wash the dishes for a week.

If Bob returns a wrecked bike to Alex, the credit event, then Alex stops washing the dishes on that day and gives the wrecked bike to Martha, Martha buys him a new bike on that day, and she has the wrecked bike to repair and resell or to throw away as she decides.

---Can this be extended to a naked CDS between brother Charlie (it's not his bike) and father Fred?

Brother Charlie says to father Fred "If Bob wrecks the bike, will you buy me a new bike too?" Fred replies "Sure, if you mow the lawn for a week; and it will depend on how badly it's wrecked." Here Charlie has bought a naked CDS from Fred, called "naked" because it's not Charlie's bike.

If Bob returns the bike safely to Alex, then Charlie has lost a little by having had to mow the lawn for a week. If Bob returns a wrecked bike to Alex, then Charlie stops mowing the lawn on that day and Fred buys him a new bike on that day. But Charlie must pay to Fred the value of the wrecked bike, for example the difference between its resale price after repair and how much it cost to repair it.

-- (talk) 23:34, 27 April 2012 (UTC)Nunibad

Nice idea, however the purpose of Wikipedia is to present facts, not to teach subject matter. WP:NOTTEXTBOOK--Hu12 (talk) 00:58, 15 May 2012 (UTC)

I have emailed Hu12 to make the point that such explanations set the stage for introducing (facts about) complex material without jargon. Indeed Zero-knowledge_proof does that effectively, and is a standard presentation for that subject (cryptography), where the same problems of complexity and jargon occur. It could work well here. After some time (if there hasn't been a reply from Hu12) I'll re-post the explanation to attract his/her attention so we can discuss it further.

Nunibad (talk) 23:55, 19 May 2012 (UTC)

I have re-inserted the informal explanation to attract the attention of those watching this page, in order to encourage discussion of whether this is an improvement and, in spite of its elementary nature, is acceptable use of the wiki. Please see Zero-knowledge_proof (as mentioned above), and note that such explanations are not in dispute within that community, one that is also used to explaining complex facts to wiki readers.

Nunibad (talk) 00:43, 27 May 2012 (UTC)

You're still not responding to the fundamental issue: Wikipedia is NOT a textbook. As a veteran of WP's ferocious flame wars, I can assure you that this component of WP:NOT has been heavily debated and the overwhelming consensus has been to maintain the status quo. Which means simplified examples are out. (Of course, if one were to present a real world example based on citations to a book or article reporting on such a transaction, that may be acceptable.) --Coolcaesar (talk) 14:37, 28 May 2012 (UTC)

List Advantages and Benefits[edit]

This is a very dry article. It's full of 'what' but there is no 'why'. I think it would be beneficial to intro readers if the advantages and benefits of credit default swaps were spelled out. I think that would allow a lot of people understand why there are periods of prolific use of credit default swaps. One documentary (first episode of Money, Power and Wall Street, Frontline PBS, 12:01 in) spelled it out as a tool to bypass the regulations requiring a bank to set aside capital when issuing a loan. This may or may not be true (I'm not an expert) but it's very difficult to figure out why they came into play in the world markets. SeanEsopenko (talk) 19:18, 27 June 2012 (UTC)

Agree. Need Why Banks Did CDS[edit]

  This article is missing from its description why a bank would engage in a credit default swap. I have no additional citations than offered above, but the benefit to a bank was to open up their ability to lend more money, in essence creating money by passing the responsibility for their debt to someone else. This essentially created a false economy worth trillions of dollars, much of which was directed toward risky real estate. Our current "recovery" is impossible because there was no real economy as strong as what we thought existed in 2008. It was money fabricated through CDS. These days banks must back their debt and are hoarding money to do so, as a result much money is not in general circulation.   PushHardly (talk) 14:07, 12 May 2014 (UTC)

External links modified[edit]

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  1. ^ [13]CDO Surge Squeezes Deutsche Bank, Vanguard Bond Funds, Bloomberg. February 6, 2007. Accessed 10-19-09.