Credit default swaps (CDS) are a form of insurance in which the buyer of the insurance makes payments (like insurance premiums) to the seller, who in turn agrees to pay the buyer if an underlying loan or security defaults.

a. A CDS agreement often lasts several years and requires that collateral be posted to protect against the inability to pay of the seller or the buyer of insurance.

b. If financial institutions do not report CDS sales and purchases, it is not clear who bears credit risk on a given loan or security.

c. When CDS are traded over the counter, even traders cannot identify others who take on concentrated risks on one side of a trade.