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Visual of the 5yr CDS for BoA, MS, Dexia, Soc Gen, Banco Popular and Unicredit

Credit default swaps are contracts designed to insure creditors against a bank (or indeed any company) going bust.


A CDS is a contract issued by big City firms or fund that guarantees the holder will be covered if a particular company defaults on its debts. It is basically a type of insurance used by large investing institutions.

EU Consultation on Derivatives, market Infrastructures, Short Selling and Credit Default Swaps

EU Commission, DG Internal Market: In order to advance swiftly in completing the necessary reforms to ensure a safe and stable financial system in Europe, the European Commission has launched two consultations in the area of financial services.

Swedish Riksbank's Persson: don't shoot CDS "messenger"

The Swedish central bank uses CDS spreads as an indicator of financial stability

Credit default swaps (CDSs) have been widely blamed for exacerbating the eurozone debt crisis, and few people will have wept on May 18 when Germany's financial regulator tried to rein the market in.

One of those who may have felt a sting of sympathy is Mattias Persson, head of financial stability at the Sveriges Riksbank, Sweden's central bank.

"We shouldn't shoot the messenger," he told Risk in an interview at the start of this month. "In Europe, the net open position in CDSs is much smaller than the amount of sovereign debt outstanding." In other words, the CDS tail isn't wagging the bond market dog – it just gives you an idea of the animal's general health.

For that reason, Persson argues the CDS market can play a useful function for anyone interested in financial stability. The Riksbank, for one, keeps an eye on CDS spreads as an early warning indicator, he says: "Looking at this crisis, I think the CDS market was actually a bit slow to react to some things that turned out to be amiss – but there was some foresight in it and it's something we follow quite carefully, along with bond spreads and a series of other metrics."

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