What Is a Credit Default Swap (CDS) and Why Is It Typically an OTC Derivative?

A Credit Default Swap (CDS) is a financial derivative that allows an investor to "swap" or offset their credit risk with that of another investor. It is essentially an insurance policy against a borrower defaulting on their debt.

CDSs are typically OTC derivatives because they are highly customized to specific debt obligations, terms, and counterparty needs. The lack of standardization makes them unsuitable for a centralized, listed exchange environment.