Credit default swaps: trading strategies and murex implementation; ICICI Securities Primary Dealership Limited (ISecPD)

Abstract

Credit Default Swaps (CDS) are the most important and widely used instrument in the global credit derivative market. In essence a default swap is a bilateral OTC agreement, which transfers a defined credit risk from one party to another. The buyer of credit protection pays a periodic fee to an investor in return for protection against a Credit Event experienced by a Reference Entity (i.e. the underlying credit that is being transferred).1 CDS are over-the-counter (OTC) transactions. They are similar to buying/selling insurance contracts on a corporation or sovereign entity’s debt, without being regulated by insurance regulators (unlike insurance, it is not necessary to own the underlying debt to buy protection using CDS). Before trading, institutional investors and dealers enter into an ISDA Master Agreement, setting up the legal framework for trading.