Credit default swaps (CDS) are the most common type of credit derivative. According to different surveys of market participants, which were summarized in Chapter 2, CDS are by far the main credit derivatives product in terms of notional amount outstanding. Their dominance of the marketplace is even more striking in terms of their share of the total activity in the credit derivatives market. ^[1] As actively quoted and negotiated single-name instruments, CDS are important in their own right, but their significance also stems from the fact that they serve as building blocks for many complex multi-name products. ^[2]

The rising liquidity of the credit default swap market is evidenced by the fact that major dealers now regularly disseminate quotes for such contracts. Furthermore, along with risk spreads in the corporate bond market, CDS quotes are now commonly relied upon as indicators of investors perceptions of credit risk regarding individual firms and their willingness to bear this risk. In addition, quotes from the CDS market are reportedly increasingly used as inputs in the pricing of other traditional credit products such as bank loans and corporate bonds, helping promote greater integration of the various segments of the credit market.