Unlike a standard CDS, it can take a form in which the contract is cancelled when the loan is repaid early, in addition to ending on a default by the borrower. When a contract is cancelled, the protection seller makes no payment. Because the reference obligation is a secured loan, the recovery rate is higher than for a CDS on bonds and similar debt.
LCDS were launched in Europe and North America in 2006. In North America, an index called LCDX, which bundles 100 LCDS with equal weights, is also traded.