What is a defining trait of the defensive stage of credit derivatives?

The defining trait of the defensive stage of credit derivatives is centered on the use of derivatives for risk management. During this phase, institutions and investors focus on mitigating their exposure to credit risk, particularly in a volatile economic environment or after a downturn in the credit cycle. Credit derivatives, such as credit default swaps (CDS), become crucial tools for managing risk, allowing entities to hedge against potential defaults and fluctuations in credit quality.

The emphasis on risk management reflects a cautious and strategic approach to navigating uncertain credit markets. By utilizing these instruments, market participants can safeguard their portfolios, ensuring that adverse credit events have a minimized impact on their financial standing.

While aspects like regulations, investment-grade loans, and highly liquid markets are relevant to the broader context of credit derivatives, they do not encapsulate the essence of the defensive stage as precisely as the focus on risk management through the use of derivatives.