1. Insurability. In insurance, the typical fraud is to overinsure something and then destroy it. You can do that because you are destroying your property. Nobod

1. Insurability. In insurance, the typical fraud is to overinsure something and then destroy it. You can do that because you are destroying your property. Nobody is trying to insure against the loss of the neighbor's house, and then go an burn it, because they commit both insurance fraud and a crime against the neighbor, the latter being punished much more severely. Similarly, I could try to buy CDS to protect against Tesla default, and then go and dynamite one Gigafactory and hope that Tesla does default, and I make a lot of money. But the law enforcement deterrence against that is huge. And if you are the type of criminal willing to break the law to such an extent, then there are simpler ways to make money. You could for example short the Tesla stock, or buy puts. Or you can just go and kidnap Musk, your sentence when you are caught will probably be lower. 2. Speculation. That's a loaded word. If you buy a bond issued by General Motors, is that speculation? You collect the coupon from GM, and you implicitly are placing a bet that GM will not default. Your action is helping GM invest in their newest assembly line. If you buy their stock, are you speculating? You are placing a similar bet, that GM will do quite well, and the stock will go up. Your action does not directly help GM (the money goes to the seller of the stock which is generally not GM), but it helps indirectly, by lowering GM's cost of funding. When you sell insurance against GM's default, you are placing a similar bet that GM will do well. This too reduces GM's cost of funding (because it reduces their credit spread, which makes it easier for bond holders to hedge their exposure, and so to buy more bonds). I would say (and everyone else would say too) that selling CDS insurance is the opposite of speculation. And by the way, in most cases it's hedge fund that sell this protection, not banks. Banks are just middlemen, they like to be "flat" risk. They buy about as much protection as they sell. 3. Buying CDS on margin. CDS is a swap, you buy on margin by definition. Both buyers and sellers of protection post collateral. Variation Margin is posted by only one (the party that is "out of the money"), and Initial Margin is posted by both.