What is a credit default swap (CDS)?

A credit default swap (CDS) is a financial derivative that allows an investor to protect against the risk of a borrower defaulting on a debt. In a CDS contract, the buyer of the swap makes periodic payments to the seller in exchange for a lump-sum payment if the underlying borrower defaults on their debt obligations. The buyer of a CDS typically seeks to hedge credit risk, while the seller assumes the risk of a default. CDSs are commonly used in the bond market, but they can also be traded on other debt instruments. They gained notoriety during the 2008 financial crisis for their role in exacerbating systemic risk.