It is official. After years and months of preparation and speculation, China has officially introduced their own version of credit default swaps to the domestic market and fulfilled a promise/goal of introducing them by this year and ahead of other countries also pondering their own domestic onshore introductions like India and Korea.
China’s National Association of Financial Market Institutional Investors (NAFMII) recently posted the release of their latest Master Agreement of financial derivatives transactions summary which is essentially their domestic renminbi/yuan-based version of the ISDA Master Agreement to govern the trading of OTC derivatives like credit default swaps (or what they are preferring to instead call ‘credit risk mitigation tools’).
NAFMII has also released a FAQ-like summary of the reasoning behind China’s recent yuan CDS launch. As well as a guidelines for the pilot program.
Among some of the highlights from its latest information release:
- Credit risk mitigation tool ‘dealers’ (i.e. users) must have capital of at least 8 billion yuan.
- Credit risk mitigation tool core ‘dealers’ (i.e. market-makers) must have capital of at least 40 billion yuan.
- A secretariat of a new dealers association responsible for managing China’s renminbi CDS initiative.
- Regular reporting to the yuan CDS dealers association and the People’s Bank of China (PBoC).
- Core dealers (market-makers, who are expected to be the primary sellers of CDS) cannot write more than 500% of CDS on an underlying company’s debt.
- It appears end users buying CDS for hedging purposes cannot but more than 100% of the value of the underlying debt being hedged.
NAFMII also released the list of participating dealers in their credit risk mitigation tool market on November 4, 2010. The list includes China Development Bank Co., Ltd., Industrial and Commerce Bank of China, Bank of China Limited, China Construction Bank Corporation, Bank of Communications Co., Ltd., China Everbright Bank Co., Ltd., China Minsheng Bank Co., Ltd., Industrial Bank Co., Ltd., Shanghai Pudong, Development Bank Co., Ltd., HSBC Bank (China) Co., Ltd., Deutsche Bank (China) Co., Ltd., BNP Paribas (China) Co., Ltd., Citibank (China) Co., Ltd., Barclays Bank Shanghai Branch, China International Capital Corporation Limited, CITIC Securities Co., Ltd. and Credit Investment Co., Ltd. As also noted by Reuters, one interesting and notable absence from the list of approved banks was Agricultural Bank of China.
Regardless, if recent past performance is an indication of future results then maybe there won’t even be much of a need for CDS in China. According to a recent Bloomberg report,
About 29 U.S. companies and five European firms failed to meet their debt obligations this year out of a global total of 40, according to Moody’s September Default Report. No company has defaulted on publicly traded debt in China since the PBOC started regulating the market in 1997, according to Ivan Chung, a senior analyst at Moody’s Investors Service in Hong Kong.
China’s economy, which grew at a 9.6 percent rate in the third quarter, will probably expand 10.5 percent this year and India’s gross domestic product will rise 9.7 percent in 2010, the International Monetary Fund said on Oct. 6. The U.S. economy will grow 2.7 percent this year, down from a 3.4 percent estimate four months ago, the Washington-based fund said.
China’s bond market is headed for its busiest year since Bloomberg began tracking the data in 1999. Companies have issued a record 771 new notes totaling 1.6 trillion yuan.