a reporting entity enters into a credit default swap with a structured entity the cr 611825

Variability of returns arising from issue of credit default swap (2)

A reporting entity enters into a credit default swap with a structured entity. The credit default swap gives the structured entity exposure to Entity Z”s credit risk. The purpose of the arrangement is to give the investors in the structured entity exposure to Entity Z”s credit risk (Entity Z is unrelated to any party involved in the arrangement).

The reporting entity does not have involvement with the structured entity that exposes it to variable returns from the structured entity because the credit default swap transfers variability to the structured entity rather than absorbing variability of returns of the structured entity.