What distinguishes a basket CDS from other types?

A basket credit default swap (CDS) is characterized by its ability to cover multiple securities or entities through a single contract. Unlike standard CDS, which typically provides protection for a single issuer or reference entity, a basket CDS is designed to encompass a group of entities. Its key feature is the way it triggers payouts. In the case of a basket CDS, it does not require payment after just one default occurs; instead, it usually operates on a predefined threshold of defaults within the basket before any payout is triggered.

This structure allows investors to hedge against credit risk across a diversified set of entities, which can enhance the tracking of broader credit market risks rather than focusing on a single issuer. Therefore, while a basket CDS may indeed provide protection related to multiple securities, it is distinct from other types due to the way payouts are conditioned on defaults across the basket rather than after any single default, which is a characteristic of other forms of CDS.