Credit default swaps (CDS) were once hailed as among the most versatile and valuable tools in credit markets, allowing investors to hedge, speculate, manage risk with precision and synthetically reproduce bond flows. Yet over the years, they have struggled to keep pace with the evolving realities of today’s credit environment, leaving them at risk of a slow and quiet decline.

But that narrative is far from inevitable.

Last week, 9fin’s webinar “No Country for Old CDS” sparked a lively discussion on how the product could be revitalised, generating numerous ideas to address the structural and operational challenges facing the market. Our four chief investment officer guests — Orlando Gemes of Fourier Asset Management, Clark Nicholls of Aucit Investment Management, Nicholas Pappas of Faros Point Capital, and Mark Rieder of La Mar Assets — each offered robust critiques of the current CDS landscape, while also outlining clear and compelling strategies to modernise the product and prepare it for the future.

This piece examines some of their key proposals.

Modern docs

One of the clearest solutions for reviving confidence in CDS would be to update its documentation so it keeps pace with the realities of today’s restructuring market. The current framework for corporate CDS has barely changed since 2014, while liability management exercises and debt-for-equity swaps have become increasingly sophisticated.

“We’ve seen a rapid expansion in the growth of the credit market over the last decade, with an increased domination of ETFs and indices,” said Gemes. “Concurrently we’ve seen a changing landscape in the leveraged finance, high yield and restructuring market, with the proliferation of LMEs, from the private capital markets into public credit, and from the US into Europe.”

As the range of technology has advanced, there has been more sponsor-on-creditor and creditor-on-creditor violence. By modernising the language to reflect practices such as equity inclusion, coercive exchanges, and restructuring support agreements, CDS contracts would once again align with how credit evolves in stressed situations.

Trigger happy

Another priority is reforming the way triggers work, so protection activates earlier, more clearly, and more fairly. As with the recent Altice France trigger (and others), investors can lose out because a credit event is only recognised after long delays or once a company’s restructuring is fully consummated.

“The problem for an investor is, if you own CDS [protection] and you paid 20 points up front for the March [expiry] date and then suddenly it doesn’t trigger until June, you’ve just lost 20 points,” said Pappas. “So there’s a lot at risk around timing. So getting the timing right is critical.”

By tying CDS triggers to economic reality — for instance, the signing of a restructuring support agreement or the point at which debt trades at distressed levels — the product would recover its credibility as a hedging mechanism that responds when losses are first crystallised. That often corresponds with when a restructuring is first announced — in the case of Altice France, the 5.5% 2029 senior secured notes lost 14 points between March and May 2024, to fall below 64 cents.

“[With Altice] the point on timing was important, because you did see the bonds trade down quite significantly,” said Rieder. “People sometimes need cash to have liquidity, and if there’s a big delay between when you’re able to recover [on CDS] and collect the cash, that’s a challenge.”

Conversely, after May 2024 the Altice bonds began to improve again, rising all the way back to 88 cents ahead of the CDS auction in August 2025. Even in March this year though, a CDS payout would have been closer to 20 cents rather than the mere 12.25 they finally settled at.

Expand and deliver

Closely related to timing is the need to broaden the scope of deliverables through asset package delivery. Many recent restructurings have left CDS holders with “dead boxes”, as Pappas put it, in which bonds vanish and nothing remains deliverable. Allowing equity, or a combination of reinstated debt and equity, to be delivered would ensure CDS continues to track the economic value of the underlying obligation, even if its legal form has changed. This adjustment would keep the instrument relevant and fair in an era when equitisation is a common outcome.

“Equitisation of debt is a standard means for correcting a balance sheet if it’s over-levered,” said Pappas. “I get there are some investors that can’t take equity, but it’s a classic tool in an LME or restructuring to right-size. If you are a cash CLO, you own loans and you’re told you’re getting equity — you’re taking it whether you like it or not. Then the question is, do you want to sell it for zero value or do you want to try to trade out of it?”

If we’re going by the letter — make it a rating

Rebuilding trust will also require stronger governance of the Determinations Committees. 9fin’s webinar panellists repeatedly highlighted the perception of conflicts of interest and an excessive focus on the letter of the law rather than the spirit. Bringing in independent members, such as lawyers or academics, or even drawing on the authority of rating agencies to define defaults, would give investors greater confidence that decisions are being made objectively and transparently, rather than in the interest of the largest players.

“One idea is… maybe it’s a third party like the rating agencies that actually become the standard bearer as to what a default trigger is — as opposed to, let’s say, a sell-side community maybe funded somewhat with some lawyer participation,” said Nicholls.

Integrating credit rating agencies into the CDS trigger mechanism could offer a more timely and transparent approach. Some structured finance products involving CDS, like asset-backed securities (following ISDA Pay-As-You-Go template), formalised (pre- the 2008/9 great financial crisis) ‘Distressed Ratings Downgrade’ clauses, triggering a credit event if the reference obligation was downgraded to "Caa2/CCC" or below, or if the rating was withdrawn by one or more rating agencies.

In the case of single name CDS, the threshold for a trigger could be when a corporate rating drops below CC.

The approach of relying solely on a small number of banks to assess credit events has led to perceptions of conflicts of interest and lack of transparency. Of course, historically rating agencies have also been criticised at times for reacting too slowly to deteriorating credit conditions — particularly in the aftermath of the 2008 financial crisis. But for now, the CDS market's size and influence relative to the LevFin universe make it unlikely to greatly sway rating agency decisions.

By incorporating rating agency actions, such as downgrades below CC or similar thresholds, into the CDS trigger mechanism, the market could achieve more consistent and timely recognition of credit events. This approach might enhance the credibility of CDS as a hedging tool and align it more closely with the realities of modern credit markets.

Eurovision — can we get in tune?

A further constructive step would be to harmonise credit event definitions across jurisdictions. As Pappas outlined, Europe’s patchwork of insolvency regimes makes CDS particularly unpredictable, with different processes in France (‘sauvegarde’), Italy (‘concordano’), Spain (‘concurso’), and the UK (English ‘scheme of arrangement’) creating uncertainty about when a default has occurred.

“Part of the nuance is that Europe cannot be considered one consistent market,” said Gemes. “Though we trade in euros, you need to have intimate knowledge of the legal, regulatory and the bankruptcy code in each of the different jurisdictions. That knowledge is not easily parsed, it’s not fungible, and then there are incredible inconsistencies between the application of the law.”

Pappas agreed this is the crux of the issue with European CDS, noting the US regime is simpler, with CDS triggers being Chapter 7, Chapter 11, failure-to-pay and restructuring.

If ISDA and regulators could promote greater consistency in the recognition of restructuring events, it would make the product more predictable and usable for global investors, while still respecting national legal frameworks.

“There is a very good need for this product,” said Pappas. “Bond deals are tiny in Europe. Your typical HY issuance is €500m. That’s hard to borrow, hard to short, a lot of variability in the borrower. So CDS should be a great product and needed from the short side to hedge — as long as it works.”

Alternative routes

At the same time, the market should recognise that CDS is not the only instrument for managing credit risk and embrace alternatives where they are better suited. Total return swaps (TRS), indices, and other derivatives are increasingly used to provide liquidity and directional exposure. TRS let one party receive the full economic return of an asset — like bonds or loans — without actually owning it, while the other party takes on the opposite exposure.

CDS can find a renewed role as a targeted hedge against restructurings and idiosyncratic defaults, coexisting with other products in a complementary ecosystem that offers investors choice depending on their objectives.

“There has been a development also of some parallel markets like the TRS market, which in principle is very similar to CDS,” said Nicholls. “With the TRS it’s usually a one- or three-month contract and one counterparty, so far easier to see what’s going to happen. One of the challenges with CDS is you’ve got a five-year or 10-year, and a lot can change in that time.”

Clear contracts, confident investors

Finally, there is a need to rebuild trust through greater transparency. Pension funds, insurers, and endowments have grown wary of CDS in part because it seems opaque and unpredictable. Industry bodies such as ISDA and the DCs could address this by publishing clearer case studies, timelines, and outcomes of credit events. By showing when and how the product works — and being candid about when it falls short — the market can demystify CDS and begin to draw hesitant investors back into the fold.

“We have to have contracts that are consistent with what is going on in the underlying market,” said Gemes. “Part of our alpha is looking at those inconsistencies, and making things more niche does potentially add alpha, but it also reduces efficiency and the number of use cases for those products, which undermines the overall quality and strength of the market.”