WikiProject Business	(Rated B-Class, Mid-priority)	BusinessWikipedia:WikiProject BusinessTemplate:WikiProject BusinessWikiProject Business articles
Business and economics portal v • d • e This article is within the scope of WikiProject Business, a collaborative effort to improve the coverage of Business on Wikipedia. If you would like to participate, please visit the project page, where you can join the discussion and see a list of open tasks.  B  This article has been rated as B-Class on the project's quality scale.  Mid  This article has been rated as Mid-priority on the project's priority scale. Comments: edit · history · watch · purge Given the importance of Credit Default Swaps in the 2008 financial crisis it is important to keep this article up-to-date and comprehensive. I agree that Credit Default Swaps are very much in the news, and controversial. This article needs considerable work, as it is filled with jargon, some of which is undefined anywhere, and lacking in enough references that are more critical than the industry sources which are cited. WP:NPOV means that we need more information in this article than we have thus far. --DThomsen8 (talk) 16:47, 20 April 2009 (UTC)

WikiProject Finance	(Rated Start-Class, High-importance)	FinanceWikipedia:WikiProject FinanceTemplate:WikiProject FinanceFinance articles
Business and economics portal v • d • e This article is within the scope of WikiProject Finance, a collaborative effort to improve the coverage of articles related to Finance on Wikipedia. If you would like to participate, please visit the project page, where you can join the discussion and see a list of open tasks.  Start  This article has been rated as Start-Class on the project's quality scale.  High  This article has been rated as High-importance on the project's importance scale. Comments: edit · history · watch · purge Given the importance of Credit Default Swaps in the 2008 financial crisis it is important to keep this article up-to-date and comprehensive. I agree that Credit Default Swaps are very much in the news, and controversial. This article needs considerable work, as it is filled with jargon, some of which is undefined anywhere, and lacking in enough references that are more critical than the industry sources which are cited. WP:NPOV means that we need more information in this article than we have thus far. --DThomsen8 (talk) 16:47, 20 April 2009 (UTC)

edit · history · watch · refresh  To-do list for Credit default swap:

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

Archives
Prior to Feb 2007

Contents 1 CDS = Ponzi Scheme ? 2 Insider Trading 3 CDS Agreements in a Bankruptcy 3.1 Comment2 3.2 What about deteriorating bank risk? 4 Question on 2nd example 5 Recognized Credit Events 6 Technical minutiae 7 The hedging example 8 The hedging example 9 Please clarify the first paragraph 10 Questionable para under "Criticisms"... 11 Opening section 12 Incomprehensible 13 Re-gig the first three paragraphs 14 History Needed 15 credit default insurance 16 weasel words 17 Financial WMD's? Global systemic risk? 18 Bad example - only tells half the story 19 Better introduction needed 20 First paragraph, Wiki Fascism or just an Ass? 21 CDS for the Complete Idiot 22 Rewriting the lead 23 single-name ? 24 single name exposure 25 Better lede, but let's illustrate it 26 History of these instruments 26.1 Auction history 27 Derivative Exposure 28 How to explain Credit default swaps? 29 Are collection agencies using credit default swaps? 30 Overhaul 31 Criticism Section 32 Let's (rather let you) start again 33 Still confused about credit insurance 34 Naming people? 35 Fiat Money 36 "Slightly misleading" 37 Clarity 38 Prices 39 Valuation 40 Duration

[edit] CDS = Ponzi Scheme ?

http://www.nakedcapitalism.com/2008/10/initial-lehman-cds-auction-90-cents-on.html 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. (90.178.144.119 (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. http://www.ft.com/cms/s/eac38298-8388-11dd-907e-000077b07658.html 131.247.83.135 (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 (talk • contribs) 19:53, 21 March 2009 (UTC)

[edit] Insider Trading

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)

[edit] CDS Agreements in a Bankruptcy

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.

[edit] Comment2

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. 194.166.212.120 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)

[edit] What about deteriorating bank risk?

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)

[edit] Question on 2nd example

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 171.192.0.10 (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 68.81.242.88 (talk) 11:51, 22 March 2009 (UTC)

[edit] Recognized Credit Events

Are rating downgrades recognized credit events? —Preceding unsigned comment added by Gonzen (talk • contribs) 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)

[edit] Technical minutiae

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)

[edit] The hedging example

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! 86.42.229.49 (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 (talk • contribs) 17:01, 27 December 2008 (UTC)

[edit] The hedging example

Good writing but how are the values in this example calculated? propably obvious but wuold be good to show the calculateions in verbatim format...192.100.116.143 (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. --99.163.50.12 (talk) 17:59, 28 September 2008 (UTC)

[edit] Please clarify the first paragraph

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 68.7.39.11 (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)

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

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 216.204.156.202 (talk) 16:12, 11 March 2009 (UTC)

[edit] Opening section

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: http://en.wikipedia.org/wiki/Commodity_Futures_Modernization_Act_of_2000 Why was it removed? I think it is important to note why regulation on CDS's is banned. —Preceding unsigned comment added by 149.136.17.253 (talk) 18:53, 9 October 2008 (UTC)

[edit] Incomprehensible

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 (talk • contribs)

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)

[edit] Re-gig the first three paragraphs

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

[edit] History Needed

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. http://www.guardian.co.uk/business/2008/sep/20/wallstreet.banking?gusrc=rss&feed=business and http://www.portfolio.com/views/columns/wall-street/2008/10/15/Credit-Derivatives-Role-in-Crash# 92.192.72.67 (talk) 11:01, 19 November 2008 (UTC)

[edit] credit default insurance

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)

[edit] weasel words

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)

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

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. --99.163.50.12 (talk) 18:44, 27 September 2008 (UTC)

[edit] Bad example - only tells half the story

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. --99.163.50.12 (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 82.24.214.128 (talk) 16:38, 10 October 2008 (UTC)

[edit] Better introduction needed

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 89.194.192.239 (talk) 06:30, 3 October 2008 (UTC)

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

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 89.194.192.239 (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. 198.240.128.75 (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 89.194.11.91 (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 86.17.173.199 (talk) 15:18, 27 October 2008 (UTC)

[edit] CDS for the Complete Idiot

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)

[edit] Rewriting the lead

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 89.194.198.180 (talk) 17:09, 8 October 2008 (UTC)

[edit] single-name ?

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)

[edit] single name exposure

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: http://www.risk.net/public/showPage.html?page=96530

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)

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

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)

[edit] History of these instruments

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:

http://accruedint.blogspot.com/2007/04/how-does-credit-default-swap-cds-work.html

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 (talk • contribs) 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: http://www.occ.treas.gov/ftp/release/2008-115a.pdf 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)

[edit] Auction history

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 (http://www.bis.org/) 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 http://www.creditfixings.com/. 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 62.47.231.208 (talk) 12:43, 2 August 2009 (UTC)

[edit] Derivative Exposure

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 88.106.139.81 (talk) 04:23, 11 October 2008 (UTC) (I replaced Sinebot blurb 84user (talk) 13:06, 12 October 2008 (UTC))

[edit] How to explain Credit default swaps?

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)

[edit] Are collection agencies using credit default swaps?

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)

• • No. 198.240.128.75 (talk) 11:25, 27 October 2008 (UTC)

[edit] Overhaul

• 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 (talk • contribs) 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! 198.240.128.75 (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. 198.240.128.75 (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. 198.240.128.75 (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)

[edit] Criticism Section

Is the Buffett quote really necessary? There's nothing specific in there about CDS; that stuff should be in the full article on derivatives. 198.240.128.75 (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. 198.240.128.75 (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 76.89.235.242 (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)

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

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 (talk • contribs) 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)

[edit] Still confused about credit insurance

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)

[edit] Naming people?

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. 198.240.128.75 (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. 78.149.159.106 (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)

[edit] Fiat Money

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 87.74.125.205 (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)

[edit] "Slightly misleading"

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? 78.145.23.13 (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)

[edit] Clarity

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. 78.32.72.252 (talk) 00:54, 24 January 2009 (UTC)

[edit] Prices

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)

[edit] Valuation

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 62.47.231.208 (talk) 12:52, 2 August 2009 (UTC)

[edit] Duration

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)