You can buy credit default swaps only in the over-the-counter institutional market, through a dealer bank, and only if you qualify as an eligible contract participant under federal law. For an individual, that means more than $10 million in discretionary investments. Everyone else who wants exposure to credit risk has to get it indirectly, usually through exchange-traded funds that track CDS indices.
There is no exchange where CDS are listed, no brokerage account that opens the door, and no retail-scale version of the contract. The market is built for institutions, and the legal, financial, and operational requirements reflect that.
Who Qualifies to Buy CDS Directly
Federal law restricts direct participation to eligible contract participants, or ECPs. The definition sits in 7 U.S.C. ยง 1a(18), and the thresholds are high enough to exclude essentially all retail investors.
Individuals
An individual qualifies with more than $10 million in amounts invested on a discretionary basis. This is investment capital you actively manage or have discretion over, not total net worth and not total assets. A lower threshold of $5 million applies if the CDS is used to hedge risk tied to an asset you own or a liability you’ve incurred.
Entities
Corporations, partnerships, trusts, and other organizations qualify if their total assets exceed $10 million. A narrower path opens for smaller entities: an organization with net worth above $1 million can qualify if it enters the contract to manage business-related risk. Financial institutions, insurance companies, and registered investment companies qualify automatically, regardless of size.
Dealer-Level Requirements
Meeting the statutory ECP bar is only the start. Most dealer banks add their own requirements on top. Many will only transact with clients who also qualify as qualified institutional buyers, which means owning and investing on a discretionary basis at least $100 million in securities of unaffiliated issuers. If you clear both hurdles, you have a shot at opening a relationship with a dealer. If you don’t, no amount of paperwork gets you into the market directly.
What You Need in Place Before Trading
Qualifying is necessary but not sufficient. Before a dealer will execute a single trade with you, two documents have to be negotiated and signed.
The first is an ISDA Master Agreement, the standardized contract that governs all future derivatives transactions between you and the dealer. The 2002 version is the market standard. It covers events of default (including failure to pay, misrepresentation, bankruptcy, and cross-default), close-out netting provisions that determine how obligations are calculated if one party defaults, and the representations each party makes about its legal authority and financial condition.
The second is the Credit Support Annex, which establishes the collateral framework: what types of collateral are acceptable, the initial margin each party must post, and the thresholds that trigger variation margin calls. Negotiating both documents typically takes weeks and involves significant legal expense. That cost alone is a practical barrier for smaller participants who technically meet the ECP definition.
On top of the bilateral documentation, standardized CDS products must clear through a central counterparty. In North America, that clearinghouse is ICE Clear Credit, which handles both single-name CDS and index products. Clearing members post original margin upfront and variation margin daily. Standardized index products like the CDX North American Investment Grade and CDX North American High Yield indices also have to be traded on swap execution facilities, which are CFTC-regulated platforms that bring some price transparency to what remains a dealer-driven market. Custom single-name contracts still trade through traditional dealer relationships.
How a Direct Purchase Actually Works
With the ISDA Master and CSA signed and a clearing arrangement in place, buying protection looks like this. You send a request for quotation to one or more dealers, specifying the reference entity, the notional amount, and the desired maturity. Typical notional amounts for single-name CDS run $10 million to $20 million per trade. The dealer responds with a spread quote expressed in basis points per year.
A concrete example. Five-year protection on an investment-grade corporate name at 80 basis points on $10 million notional costs roughly $80,000 per year, paid in quarterly installments on the standardized dates of March 20, June 20, September 20, and December 20. Premiums accrue on an actual/360 day count. High-yield names carry wider spreads, often several hundred basis points, reflecting greater default risk.
For standardized index products, electronic platforms let you solicit competitive quotes from multiple dealers at once. Single-name contracts on less liquid reference entities trade more like traditional dealer markets, where the relationship and the negotiation drive the price.
After execution, the position is marked to market every day. The clearinghouse can make intraday margin calls when conditions deteriorate. If your reference entity’s creditworthiness worsens, your protection gains value and your counterparty has to post more collateral; if it improves, the flow reverses. This daily cycle continues until the contract matures, a credit event occurs, or you unwind through an offsetting trade.
Indirect Access Through ETFs and Funds
If you don’t have $10 million in discretionary investments and an ISDA Master Agreement, you can still get credit-derivatives exposure through products that trade on ordinary stock exchanges.
The most direct route is exchange-traded funds and notes that track CDS indices. ProShares offers ETFs tied to the CDX North American High Yield index, which references a basket of high-yield corporate issuers. The CDX North American Investment Grade Index, which tracks 125 of the most liquid investment-grade North American entities, is another widely followed benchmark. These products let you take long or short positions on broad credit risk without touching the OTC market.
Some actively managed bond funds also use CDS contracts inside their portfolios, either to hedge credit risk in their bond holdings or to express views on specific sectors or issuers. When you invest in one of those funds, you’re outsourcing the legal infrastructure, margin management, and counterparty relationships to the fund manager. You give up control over which names are referenced and when positions are opened or closed.
These indirect vehicles do not offer the customization that makes the OTC market valuable to institutions. You cannot buy protection on a specific company’s debt through an ETF. For most investors, broad credit-risk exposure through an index product is both sufficient and far more practical than trying to navigate the institutional market.
You Don’t Need to Own the Bond
One assumption worth clearing up: buying CDS protection does not require you to own the underlying bond. A position without the underlying is called a “naked” CDS, and it is legal in the United States. The EU banned naked sovereign CDS in 2012, but the U.S. did not restrict the practice, instead pushing the market toward centralized clearing. So if you do qualify to trade directly, you can use CDS purely to bet on default, without holding any of the reference entity’s debt.