Credit default swap

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A credit default swap (CDS) is a type of unregulated insurance in which the insurer agrees to cover the remainder of a third party's debt in the event that the third party defaults on the debt. The United States requires anything sold as "insurance" to follow certain rules in order to ensure that the insurance will actually be able to pay off any claims that might be made; the companies which sell CDSs wanted to get around these, which is why they are sold as "credit default swaps" instead of "loan insurance".

CDSs are a form of financial derivative, and were believed to be one of the key catalysts of the 2008 financial meltdown, when many loans defaulted simultaneously and AIG, the insurer underwriting most CDSs, did not have the money to cover them.

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