Credit derivatives

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A credit derivative is a privately negotiated agreement that explicitly shifts credit risk from one party to the other.[1] Credit Default Swaps ("CDS") are credit risk transfer vehicles that are used increasingly to assess credit worthiness.[2]

There was approximately $54 trillion in the credit derivatives market as of October 2008.[3]

Credit default swaps (CDS) are the most common type of credit derivative. American International Group (AIG)'s collapse was thought to stem from a $441 billion exposure to credit-default swaps and other derivatives.

Credit default swaps are private contracts that insure against the default of debt issuers. CDS indexes are used as a hedging tool against a basket of CDS or bonds and are standardised while individual CDS relate to a single company and are more bespoke.[4]

Lehman Brothers' credit default swaps settlement auction was one of the most expensive payouts in the history of the market.[5]

A controversy surrounding sovereign credit default swaps - a form of protection against default by a country on its treasury debt - erupted in 2011, as Greece threatened to default on its debt securities. The controversy involves the question of exactly what constitutes a "credit event". European Union policymakers have suggested a voluntary restructuring, or "reprofiling" of Greek debt would not constitute a credit event. Holders of such CDS, would not be entitled to a claim, even though debtholders would not be receiving the full present value of the debt.[6]