A credit default swap (CDS) transaction which has as underlying a bond such as an asset-back security (ABS) or a residential mortgage backed security (RMBS). The protection seller compensates the protection buyer over the life of the swap for any cash flow shortfalls in terms of interest or principal payments. This swap (known for short as PAUG CDS) is cash flow driven, not single event driven as in regular credit default swaps traded by private companies.

PAUG CDS is structured in such a way to mirror the cash flows on the underlying reference obligation (note/ bond). A PAUG CDS entails no single payment (or exchange of reference obligation), but rather the protection seller makes contingent cash payments reflecting any write-downs on the reference obligation. More specifically, this swap covers principal write-down, interest shortfall, and failure to pay the principal.

Having a position in a PAUG CDS, an investor would synthetically have an exposure to the ABS market.