Credit Default Swap (Credit Default Swap, CDS) is a swap designed to insure its buyer against the risk of default by the borrower.
In this case, there are three sides:
- The borrower is the person who borrows the funds.
- The lender, who is also the buyer of the credit default swap, is the person who provides the loan to the borrower.
- A swap seller who receives a premium from the buyer of the swap, but undertakes to compensate the losses to the lender — the buyer of the swap, if the borrower is unable to repay the loan.
In the event of an insurance situation, the right to recover funds from the borrower passes to the swap seller.