China CDS Rules Said to Pass Vote by Some Market Participants

  • NAFMII financial derivatives committee members reviewed rules
  • China Merchants Bank says market is in great need of CDS

China’s bond regulator held a meeting in Beijing earlier this week at which some market participants voted to pass proposed rules for credit-default swaps as the nation considers starting trading, people familiar with the matter said.

The National Association of Financial Market Institutional Investors’ meeting on Tuesday was attended by members of its financial derivatives committee, according to the people, who asked not to be identified because the details are private. The committee includes officials from domestic and foreign banks and domestic brokerages, according to the regulator’s website.

Chinese investors have called for financial products that hedge credit risks after at least 10 firms missed local bond payments this year, already exceeding the tally for the whole of 2015. The yield premium of one-year AA- rated corporate bonds over similar-maturity government notes rose 16 basis points last month, after the biggest gain in 11 months in April, according to Chinabond data.

“The market has never been in greater need of products to hedge against credit risks,” said Liu Dongliang, a senior analyst at China Merchants Bank Co. in Shenzhen. “CDS would help appease the fears following a surge in defaults and help investors to detect those with the highest risks earlier.”

Rule Details

The rules said credit events should include bankruptcy and payment default, according to the people. Such events may also include obligation acceleration, potential obligation acceleration or debt restructuring, said the people.

There was no immediate response from NAFMII to an e-mail sent by Bloomberg seeking comment.

Authorities issued rules on bond default hedging instruments called “credit risk mitigation tools” in 2010, with NAFMII saying at the time that products must focus on specific underlying debt and restricting leverage. Shi Lei, head of fixed-income research at Ping An Securities Co., said there is almost no trading of credit risk mitigation tools because the instruments are linked to single bonds of issuers.

— With assistance by Xize Kang, and Judy Chen

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