Credit Default Swaps, Guarantees and Insurance Policies: Same Effect, Different Treatment?

Credit default swaps (CDS), guarantees and insurance policies are used regularly by financial institutions seeking to protect themselves from counterparty failures or, in the case of CDS, also to engage in speculative trading or arbitrage activity. However, the proper characterisation of such instruments can be important from a legal, regulatory and accounting perspective. This article examines the issue of how credit default swaps, guarantees and insurance policies are used to achieve similar aims in respect of credit protection, but which need to be characterised in particular ways so as to avoid certain outcomes which may be undesirable for the parties involved.