The difference or gap between a CDS premium and a corresponding par asset swap spread for the same reference entity. The following formula defines this basis:

CDS-cash basis = CDS premium – par asset swap spread

This basis could be:

• Zero: when CDS premium = par asset swap spread.
• Negative: when par asset swap spread > CDS premium. In this case, arbitrageurs enter the scene and buy protection in a CDS contract and buy the asset swap in the hopes that the basis will narrow and eventually become zero.
• Positive: when par asset swap spread < CDS premium. Again, arbitrageurs jump and do just the opposite, expecting the basis will eventually close.

However, a nonzero CDS-cash basis is not necessarily the result of temporary supply and demand dislocations, but rather can be driven by some fundamental factors including: (1) liquidity risk differentials, (2) funding risk in asset swaps, (3) accrued premiums in CDS contracts, (4) counterparty credit risk, (5) default-contingent exposure in asset swaps, and (6) cheapest-to-deliver features of CDS contracts.