Editing Derivative (finance) (section)

===Credit default swap===
A [[Credit default swap|'''credit default swap''' ('''CDS''')]] is a [[Swap (finance)|financial swap]] agreement that the seller of the CDS will compensate the buyer (the creditor of the reference loan) in the event of a loan [[Default (finance)|default]] (by the debtor) or other [[credit event]]. The buyer of the CDS makes a series of payments (the CDS "fee" or "spread") to the seller and, in exchange, receives a payoff if the loan defaults. It was invented by [[Blythe Masters]] from [[J.P. Morgan & Co.|JP Morgan]] in 1994.
In the event of default the buyer of the CDS receives compensation (usually the [[face value]] of the loan), and the seller of the CDS takes possession of the defaulted loan. However, anyone with sufficient collateral to trade with a bank or hedge fund can purchase a CDS, even buyers who do not hold the loan instrument and who have no direct [[insurable interest]] in the loan (these are called "naked" CDSs). If there are more CDS contracts outstanding than bonds in existence, a protocol exists to hold a [[Credit default swap#Auctions|credit event auction]]; the payment received is usually substantially less than the face value of the loan.<ref>{{cite news |url=http://ftalphaville.ft.com/blog/2012/01/05/779501/why-do-they-exist |title=Credit event auctions: Why do they exist? |work= FT Alphaville |author = Lisa Pollack |date=January 5, 2012 }}</ref>
Credit default swaps have existed since the early 1990s, and increased in use after 2003. By the end of 2007, the outstanding CDS amount was $62.2&nbsp;trillion,<ref name='ISDA Annual Chart'>{{cite web |url=http://www.isda.org/statistics/pdf/ISDA-Market-Survey-annual-data.pdf |title=Chart; ISDA Market Survey; Notional amounts outstanding at year-end, all surveyed contracts, 1987–present |access-date=April 8, 2010 |publisher=[[International Swaps and Derivatives Association]] (ISDA) |archive-url=https://web.archive.org/web/20120307124122/http://www.isda.org/statistics/pdf/ISDA-Market-Survey-annual-data.pdf |archive-date=March 7, 2012 |url-status=dead  }}</ref> falling to $26.3&nbsp;trillion by mid-year 2010<ref name="test">[http://www.isda.org/statistics/recent.html "ISDA 2010 Mid-Year Market Survey"] {{Webarchive|url=https://web.archive.org/web/20110913153054/http://www.isda.org/statistics/recent.html |date=September 13, 2011 }}. Latest available a/o March 1, 2012.</ref> but reportedly $25.5<ref>{{cite web |url=http://www.isdacdsmarketplace.com/market_statistics |title=ISDA: CDS Marketplace |publisher=Isdacdsmarketplace.com |date=December 31, 2010 |access-date=March 12, 2012 |archive-date=January 19, 2012 |archive-url=https://web.archive.org/web/20120119141741/http://www.isdacdsmarketplace.com/market_statistics |url-status=dead }}</ref>&nbsp;trillion in early 2012. CDSs are not traded on an exchange and there is no required reporting of transactions to a government agency.<ref name="IMF254">{{cite journal |title=Credit Derivatives: Systemic Risks and Policy Options |journal= IMF Working Papers |date=November 2009|first=John |last=Kiff |author2=Jennifer Elliott |author3=Elias Kazarian |author4=Jodi Scarlata |author5 =Carolyne Spackman  |volume= 09|issue=WP/09/254 |pages= 1|doi= 10.5089/9781451874006.001 |doi-broken-date= February 25, 2025 |s2cid= 167560306 |url= http://www.imf.org/external/pubs/ft/wp/2009/wp09254.pdf |access-date=April 25, 2010 }}</ref> During the [[2008 financial crisis]], the lack of transparency in this large market became a concern to regulators as it could pose a [[systemic risk]].<ref name='Deutsche Bank Report'>{{cite journal|title=Credit default swaps: Heading towards a more stable system|journal=Deutsche Bank Research: Current Issues|date=December 21, 2009|author1=Christian Weistroffer|author2=Deutsche Bank Research|url=http://www.dbresearch.com/PROD/DBR_INTERNET_EN-PROD/PROD0000000000252032.pdf|access-date=April 15, 2010|archive-date=February 2, 2010|archive-url=https://web.archive.org/web/20100202200136/http://www.dbresearch.com/PROD/DBR_INTERNET_EN-PROD/PROD0000000000252032.pdf|url-status=dead}}</ref>

<ref name='Sirri Testimony'>{{cite news | url= https://www.sec.gov/news/testimony/2008/ts101508ers.htm |title= Testimony Concerning Credit Default Swaps Before the House Committee on Agriculture October 15, 2008 |access-date=April 2, 2010 |first=Erik |last=Sirri}}</ref><ref name='Partnoy Article'>{{cite journal |title= The Promise And Perils of Credit Derivatives |journal= University of Cincinnati Law Review |year=2007 | author1 = Frank Partnoy |author2 =David A. Skeel, Jr. |volume=75 |pages=1019–1051 |ssrn=929747|author1-link= Frank Partnoy }}</ref> In March 2010, the [DTCC] Trade Information Warehouse announced it would give regulators greater access to its credit default swaps database.<ref>{{cite news |url=http://www.dtcc.com/news/press/releases/2010/data_release_policy.php |title=Media Statement: DTCC Policy for Releasing CDS Data to Global Regulators |access-date=April 22, 2010 |date=March 23, 2010 |work=Depository Trust & Clearing Corporation |url-status=dead |archive-url=https://web.archive.org/web/20100429154058/http://www.dtcc.com/news/press/releases/2010/data_release_policy.php |archive-date=April 29, 2010  }}</ref>
CDS data can be used by [[financial risk management|financial professionals]], regulators, and the media to monitor how the market views [[credit risk]] of any entity on which a CDS is available, which can be compared to that provided by [[Credit rating agency|credit rating agencies]]. U.S. courts may soon be following suit.
Most CDSs are documented using standard forms drafted by the [[International Swaps and Derivatives Association]] (ISDA), although there are many variants.<ref name="Deutsche Bank Report"/> In addition to the basic, single-name swaps, there are [[basket (finance)|basket]] default swaps (BDSs), index CDSs, funded CDSs (also called [[credit-linked note]]s), as well as loan-only credit default swaps (LCDS). In addition to corporations and governments, the reference entity can include a [[special-purpose vehicle]] issuing [[Asset-backed security|asset-backed securities]].<ref name='Mengle Overview'>{{cite journal |title= Credit Derivatives: An Overview |journal= Economic Review (FRB Atlanta) |date= 2007 |first= David |last= Mengle |volume= 92 |issue= 4 |url= http://www.frbatlanta.org/filelegacydocs/erq407_mengle.pdf |access-date= April 2, 2010 |archive-url= https://web.archive.org/web/20101214063532/http://www.frbatlanta.org/filelegacydocs/erq407_mengle.pdf |archive-date= December 14, 2010 |url-status= dead }}</ref>
Some claim that derivatives such as CDS are potentially dangerous in that they combine priority in bankruptcy with a lack of transparency. A CDS can be unsecured (without collateral) and be at higher risk for a default.