Credit Default Swap [CDS] Law and Legal Definition

Credit default swaps, or CDS, are insurance against the risk of default on a debt. The seller of these swaps receive regular payments from the buyer, and in turn assumes the risk that the underlying debt will not be repaid. In the event of default, the seller of the contract has to reimburse the buyer for the unpaid interest and the principal of the debt. In short, the buyer of a credit swap receives credit protection, whereas the seller of the swap guarantees the credit worthiness of the product. By doing this, the risk of default is transferred from the holder of the fixed income security to the seller of the swap.

Credit default swaps are generally non-standardized private contracts between the buyer and the seller. They are not traded on any exchange, and have remained unregulated by any government body. The International Swaps and Derivatives Association (ISAD) publish guidelines and general rules that can be used to write CDS contracts.