Number: RS22932
Title: Credit Default Swaps: Frequently Asked Questions
Authors: Edward Vincent Murphy, Government and Finance Division 
Abstract: Credit default swaps are contracts that provide protection against default by third parties, similar to insurance. These financial derivatives are used by banks and other financial institutions to manage risk. The rapid growth of the derivatives market, the potential for widespread credit defaults (such as defaults for subprime mortgages), and operational problems in the over-the-counter (OTC) market where credit default swaps are traded, have led some policymakers to inquire if credit default swaps are a danger to the financial system and the economy. For example, the establishment of a conservatorship for the government sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, in September 2008 potentially triggered credit default swap contracts with notional value exceeding $1.2 trillion. Processing and covering these commitments may be difficult. This report defines credit default swaps, explains their use by banks for risk management, and discusses the potential for systemic risk.
Pages: 6
Date: September 9, 2008