It stands for forward-starting basket default swap; a forward contract which obliges the holder to buy or sell a basket default swap (BDS) at a specified time in the future. For example, an investor may enter into a forward-starting basket default swap (FBDS) in order to buy, at a future date (say one year from today), a 4-year protection on second-to-default BDS with 8 underlying assets. The swap will start one year later and the premium is 150 basis points per annum.
During the first year, the buyer and seller exchange not payments. If, at the end of the first year, five names in the underlying basket have ended up with default, the holder of the forward contract is contractually bound to enter into a 4-year second-to-default basket swap on the remaining reference entities (3 out of 8). The premium is calculated at 150 basis points per year on the outstanding notional value.
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