In [[finance]], a credit derivative refers to any one of "various instruments and techniques designed to separate and then transfer the [[credit risk]]"ref or the risk of an event of default of a corporate or sovereign borrower, transferring it to an entity other than the lenderrefref or debtholder.
An unfunded credit derivative is one where credit protection is bought and sold between bilateral counterparties without the buyer having to put up money upfront or at any given time during the life of the deal unless an event of default occurs. Usually these contracts are traded pursuant to an master agreement. Most credit derivatives of this sort are [[credit default swaps]]. If the credit derivative is entered into by a financial institution or a [[special purpose vehicle]] (SPV) and payments under the credit derivative are funded using [[securitization]] techniques, such that a debt obligation is issued by the financial institution or SPV to support these obligations, this is known as a funded credit derivative.
This synthetic securitization process has become increasingly popular over the last decade, with the simple versions of these structures being known as synthetic [[...|CDO]]s; [[credit-linked note]]s; [[single tranche CDOs]], to name a few. In funded credit derivatives, transactions are often rated by rating agencies, which allows investors to take different slices of credit risk according to their risk appetite.ref
7 lines hidden (568 characters)
On May 15, 2007, in a speech concerning credit derivatives and liquidity risk, Geithner stated: “Financial innovation has improved the capacity to measure and manage risk.” ref
The ref reported in April 2007 that total notional amount on outstanding credit derivatives was $35.1 trillion with a gross [[market value]] of $948 billion ([http://www.isda.org ISDA's Website]). As reported in [[The Times]] on September 15, 2008, the "Worldwide credit derivatives market is valued at $62 trillion".ref
Although the credit [[derivatives market]] is a global one, London has a market share of about 40%, with the rest of Europe having about 10%.ref
The main market participants are banks, hedge funds, insurance companies, pension funds, and other corporates.ref