A swap that references a set of single name credit default swaps. The portfolio will be customized to meet the requirements of a given investor/manager as the risk exposure is not linked to standard CDS indices (such as the European iTraxx indices or US CDX series), but rather it is bespoke, i.e., it is individually tailored to an investor’s/ client’s own preferences and desired areas of investment. A bespoke portfolio is a one that is sold on a one-off basis.

Fundamentally, portfolio swaps allow investors and managers to have exposure to assets without actually holding them in their portfolios. The portfolio is typically constructed of a basket of assets (assets could either be long or short), and a counterparty is called for to hold the basket. As a part of the transaction, the investor enters into a swap with the counterparty to receive the return on the basket and pay, in return, a negotiated financing cost plus a preset spread. The counterparty will be required to pass on any gains/losses from the basket to the investor who pays the counterparty a financing cost for administering the basket. The financing cost is determined based on the outstanding value of the basket at the end of the day. The outstanding value is the swap notional amount.