Attention on credit derivatives

THE China Banking Regulatory Commission circulated draft guidelines intended to assist the development of the nation's credit-derivative market.

The guidelines aim to improve regulations covering the trading of credit derivatives and risk control, the regulator said in a phone text message yesterday. The document was distributed to banks and other organizations for discussion, the message said.

Proposals include allowing credit-default swap contracts to be written on companies, in addition to their debt, in line with international standards, said a person familiar with the matter yesterday.

The CBRC also proposed that non-bank sellers of credit- default swaps should put up 50 percent of the contract's value as collateral when selling protection to the nation's banks, the person said, asking not be identified as the details haven't been made public.

China introduced so-called credit-risk mitigation tools last November to help reduce risk in the banking system. The National Association of Financial Market Institutional Investors, or NAFMII, a regulator, said at the time products must focus on specific underlying debt and issued rules restricting leverage.

Only 23 contracts that cover individual bonds and loans and have a notional value of 2 billion yuan (US$308 million) have been sold so far, according to NAFMII.

There have been a further eight so-called warrant versions of the products, which can be traded and are centrally cleared, with a value of 690 million yuan, according to a China Construction Bank Corp presentation earlier this month.

The China unit of HSBC Holdings Plc sold 10 million yuan of so-called warrants, the company said in December.

The use of new risk-management products doesn't need the approval of the banking regulator, the CBRC said in its message.

NAFMII, the body under the People's Bank of China that regulates the interbank bond market, declined to comment when asked about the proposals yesterday.

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