Credit Default Swaps (CDS)

Definition

A contract in which one party pays periodic premiums to another in exchange for a payment if a named borrower defaults or another specified credit event occurs, shifting that borrower's credit risk without transferring the debt itself. Federal law lists credit default swaps among the contracts that are swaps under the Commodity Exchange Act^[1], and treats one as a security-based swap, regulated by the SEC, when it is based on a single security, loan, or issuer or a narrow-based index^[2].

Federal law

1. Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111-203, § 721, 124 Stat. 1658 (Commodity Exchange Act § 1a(47), 7 U.S.C. § 1a(47)). Defined 'swap' in the Commodity Exchange Act, expressly including credit default swaps (7 U.S.C. § 1a(47)). Official text: govinfo.gov, U.S. Government Publishing Office.
2. Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111-203, § 761, 124 Stat. 1754 (Securities Exchange Act § 3(a)(68), 15 U.S.C. § 78c(a)(68)). Defined 'security-based swap' in the Securities Exchange Act, covering swaps based on a single security, loan, or issuer or a narrow-based security index (15 U.S.C. § 78c(a)(68)). Official text: govinfo.gov, U.S. Government Publishing Office.