CREDIT DEFAULT SWAPS UNDER THE LAWS OF THE NETHERLANDS ANTILLES
A method to reduce a credit risk
A credit default swap is an agreement between two parties which allows the transfer of a third party credit risk from one party (the lender) to the other. The lender, for example a bank, faces a credit risk if it borrows money to a client and it may want to ‘short’ this risk. If the lender wants to reduce the risk, it may enter into a credit default swap. It’s counterparty then takes on the default risk of the borrower, similar to the risk of a direct loan to the borrower. The parties may agree, for example, that upon the default of the borrower, the lender’s counterparty will have to purchase from the lender the loan.
The lender’s counterparty under the swap agreement is selling ‘insurance’ to the lender against the default of the borrower. It should be noted that the concept of ‘insurance’ in this context is not similar to the concept of insurance used in relation to insurance companies and policies, although there are certain similarities. The party selling the ‘insurance’ in fact guarantees the credit-worthiness of the borrower, for which it receives a (risk) premium, a periodic fee, from the lender.
Credit default swaps are somewhere in-between a derivative product and a cash instrument; they frequently involve a Netherlands Antilles Special Purpose Vehicles. Netherlands Antilles SPVs are commonly used in both cross-border financing transactions as well as in Netherlands Antilles domestic financing transactions.
Karel Frielink
Attorney (Lawyer) / Partner
