As wikipedia says, with insurance there has to be a debt obligation. With CDS there is none. i.e I can't buy life insurance on you, but I could (potentially) bu

As wikipedia says, with insurance there has to be a debt obligation. With CDS there is none. i.e I can't buy life insurance on you, but I could (potentially) buy a CDS that covers me if you declare bankruptcy. Maybe CDS 'should' be regulated as insurance but thats for another day. :) Anyway.. for those that are interested.. From: http://en.wikipedia.org/wiki/Credit_default_swap http://en.wikipedia.org/wiki/Credit_default_swap CDS contracts have been compared with insurance, because the buyer pays a premium and, in return, receives a sum of money if one of the events specified in the contract occurs. However, there are a number of differences between CDS and insurance, for example: - The buyer of a CDS does not need to own the underlying security or other form of credit exposure; in fact the buyer does not even have to suffer a loss from the default event.[1][2][3][4] In contrast, to purchase insurance, the insured is generally expected to have an insurable interest such as owning a debt obligation; -the seller need not be a regulated entity; -the seller is not required to maintain any reserves to pay off buyers, although major CDS dealers are subject to bank capital requirements; -insurers manage risk primarily by setting loss reserves based on the Law of large numbers, while dealers in CDS manage risk primarily by means of offsetting CDS (hedging) with other dealers and transactions in underlying bond markets; -in the United States CDS contracts are generally subject to mark to market accounting, introducing income statement and balance sheet volatility that would not be present in an insurance contract; Hedge Accounting may not be available under US Generally Accepted Accounting Principles (GAAP) unless the requirements of FAS 133 are met. In practice this rarely happens.