Who typically purchases credit default swaps (CDS)?

Financial institutions are the primary purchasers of credit default swaps (CDS) because these entities are heavily involved in the management of credit risk and often have significant exposure to various debt instruments. By purchasing CDS, financial institutions can hedge against potential defaults on the assets they hold, such as bonds or loans. This allows them to protect their portfolios from credit-related losses, thereby enhancing their overall risk management strategies.

Additionally, financial institutions often engage in trading CDS to take speculative positions on credit risk. They can either buy swaps to insure against defaults or sell them to earn premiums from those seeking protection. This activity helps deepen the market for CDS, providing liquidity and enabling other market participants to engage in similar practices.

While the other groups listed, such as individual investors, government entities, and corporations, might interact with CDS markets to some extent, they do not engage with these instruments with the same frequency or volume as financial institutions. Individual investors typically lack the expertise and capital to manage the complexities of CDS. Corporations may use swaps to hedge specific exposures but do not participate as a primary market player. Government entities may be involved in financial regulation or oversight but are not key buyers in the CDS market. Thus, the inherent characteristics and motivations of financial institutions make them the typical purchasers