CDS, CDS Indices, and Credit-Linked Notes
All three transfer the credit risk of reference entities. Whether one name or many is referenced, and whether the instrument is a derivative or a bond, changes how it is funded, how cash moves, and which credit risks are borne.
| Point of comparison | CDS | CDS indices | Credit-linked notes (CLNs) |
|---|---|---|---|
| What is referenced | A single reference entity, such as a company or a country | Multiple reference entities bundled under set rules, each with an equal weight | A specific reference entity, such as a company |
| Derivative or bond | An over-the-counter derivative contract made off exchange | An over-the-counter derivative, most of which is cleared through a central counterparty | A structured note that embeds a CDS in a bond |
| Funding at the start | An unfunded form, with no payment of the face amount | A coupon fixed for each index is paid, and an upfront amount is exchanged at the trade date | The investor pays the face amount up front (a funded form) |
| Cash flows between protection buyer and seller | The buyer pays a premium, and the seller covers the buyer's loss on a credit event | The buyer pays the coupon on the full notional amount, and the seller pays the loss on any one constituent that suffers a credit event | The investor takes the protection seller's position, and the premium it receives raises the interest the note pays |
| Settlement on a credit event | Physical settlement pays the face amount, and cash settlement fixes the price of the obligation and pays the difference from the face amount | The seller pays the loss on the affected constituent in proportion to its weight, and the notional amount is reduced by that weight's share | The note is redeemed at an amount set by the market value of the reference entity's obligation or similar, so the principal is not repaid in full |
| Counterparty and issuer exposure | The buyer bears the credit risk of the seller | In cleared trades a central counterparty is the counterparty, and in uncleared trades the credit risk is borne against each counterparty | In the form issued by an SPC, the investor bears the credit risk of the issuer of the collateral bond and of the CDS counterparty, in addition to that of the reference entity |
The table follows the explanations and sources in the linked articles.
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Last reviewed: 2026-10-19