Loan Credit Default Swap (LCDS)

A typical swap involves trading the proceeds of some investment. You hold a fixed-rate debt security. Someone else holds an adjustable-rate one. You exchange the amount of money generated from the investments. You don't swap the actual securities, just the proceeds.

A loan credit default swap follows the same pattern, except the thing getting swapped is exposure to a loan.

You loaned $1,000 to your deadbeat cousin. Now you're having a hard time getting him on the phone. Meanwhile, your sister loaned $500 to her friend Terri. Terri is a much better bet...responsible, reliable, very likely to repay the debt.

You and your sister arrange a loan credit default swap. Now she has exposure to your $1,000 loan...more likely to default, but with a higher upside. You take over her loan to Terri...more of a sure thing, but on a smaller scale.