Just what are credit derivatives?

Like any other financial derivative, credit derivatives provide payoff to the investor that depends upon the underlying default risk associated with any financial instrument, especially bank loans. Of late, the growth in credit derivatives market has been phenomenal, especially in the United States and in European countries. Going by the British Bankers' Association Survey the global credit derivatives market comprised nearly $1 trillion as of year 2000. Probably the greatest motivation behind such a growth has been …

…be bridged through the introduction of credit derivatives which can involve other dominant market players such as insurance companies, mutual funds and corporate sector in these transactions. Credit derivatives, if introduced, can not only supplement the ongoing process of securitisation but also help reduce the inefficiencies in the existing loan market. This, however, presupposes the existence of a sound regulatory setup to address the legal and documentation issues involving credit derivative transactions. source: Rediff site