Toward a New Framework and a Better Understanding of Credit Default Swaps

by Ari Brandes of Georgetown University

April 21, 2008

Abstract: Derivative contracts with contingent payments have been the subject of a great deal of financial commentary and news during the recent credit crunch. The taxation of one seemingly ubiquitous type of derivative contract with contingent payments - the credit default swap (CDS) - remains uncertain and is, indeed, a question without a simple answer, especially for investors and speculators using CDSs. The wide use of CDSs, as illustrated by the approximately $43 trillion of notional amount of CDSs outstanding in the middle of 2007, coupled with the broader question of how a certain broader class of derivative contracts with contingent payments, as described below, should be taxed, warrants continuing analysis and discourse in this area.

Published in: Derivatives and Financial Instruments, Vol. 10, No. 3, (May/June 2008), pp. 75-91.