Credit default swaps

KNOWLEDGE CENTRE

In the first of a new series of topical briefing notes, Knowledge Centre considers the impact of credit default swaps

First things first - what exactly is a credit default swap? In existence for about a decade now, the credit default swap or "CDS", is a credit derivative and features among the wider-ranging investment powers available to funds under Ucits III. Essentially, a CDS is like an insurance contract. A fund manager can use a CDS either to buy or sell protection. By buying protection, he is insulating a bond or bonds he owns from default or downside shocks - essentially by laying off his risk to the seller. If he sells protection, he is receiving a premium for underwriting the credit risk of the b...