Credit Default Swap (CDS) is a financial derivative that acts as a form of insurance against the default of a borrower. In a CDS contract, the buyer pays a periodic premium to the seller, who, in return, agrees to compensate the buyer if a specified credit event, such as default or bankruptcy of a borrower, occurs. CDS contracts are widely used by banks, financial institutions, and investors to manage credit risk and protect portfolios.

The primary purpose of a CDS is risk management. By purchasing a CDS, lenders or investors can hedge against the risk of a borrower failing to meet debt obligations. This allows financial institutions to stabilize their balance sheets and maintain confidence in lending and investment activities, even in volatile credit markets.

CDS contracts are standardized, with defined terms including the reference entity, notional amount, premium, and maturity period. They can be traded over-the-counter (OTC) or on regulated platforms. While CDS provides protection against credit risk, it is important to note that they involve counterparty riskóthe risk that the seller may fail to fulfill the contract.

In India, CDS usage is regulated under SEBI guidelines for certain corporate bonds and financial instruments. Regulatory oversight ensures transparency, reporting, and risk management, preventing misuse while maintaining market integrity.

In summary, a Credit Default Swap (CDS) is a derivative instrument that transfers credit risk from a lender to a protection seller. By understanding its purpose, mechanics, and regulatory framework, investors and financial institutions can effectively manage credit exposure, protect portfolios, and make informed financial decisions within SEBI-compliant frameworks.