Credit Derivatives

Credit derivatives are financial contracts that allow one party to transfer the credit risk of an underlying entity — a corporate borrower, sovereign, or structured product — to another party without transferring the actual underlying asset. The most common credit derivative is the Credit Default Swap (CDS), where the protection buyer pays a periodic premium and receives a payment if the reference entity defaults or experiences a specified credit event. Other credit derivatives include Total Return Swaps (TRS) and Credit Linked Notes (CLN). In India, the RBI and SEBI have been progressively developing the domestic credit derivative market, with CDS on Indian corporate bonds being permitted for eligible participants. Credit derivatives are used by banks, insurance companies, and institutional investors to manage credit concentration risk in their loan or bond portfolios.