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China to Consider Starting Trading of Credit-Default Swaps

  • NAFMII sought views on CDS and credit-linked notes, people say
  • CFETS held meeting with some institutions last week, they say

China is considering starting trading of credit-default swaps as the number of corporate nonpayments surges, according to people familiar with the matter.

The National Association of Financial Market Institutional Investors, a central bank subsidiary which oversees interbank market bonds, last month sought opinions on CDS and credit-linked notes from market participants including banks and brokerages, according to the people, who asked not to be identified because the details haven’t been announced. China Foreign Exchange Trade System, which oversees interbank bond trading, held a meeting in Shanghai last week with some financial institutions on the products, they said.

Rising defaults among Chinese companies are fueling investor demand for financial products that hedge credit risks, amid a rout in the world’s third-biggest note market. At least seven firms have missed local security payments this year, already reaching the tally for the whole of 2015. Authorities issued rules on bond default hedging instruments called “credit risk mitigation tools” in 2010, with NAFMII saying at the time products must focus on specific underlying debt and restricting leverage.

"There has always been demand for CDS, but there are many concrete problems to solve,” said Zhao Hengyi, deputy director of the bond fund department at HFT Investment Management Co. in Shanghai. “For example, investors would have small demand for issuers with low credit risks and big demand for issuers with high credit risks, which will lead to structural imbalance.”

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NAFMII didn’t immediately reply to e-mailed request for comment. CFETS didn’t immediately reply to a fax seeking comment.

Regulators want to provide investors access to products that hedge credit risks, according to the people.

Shi Lei, head of fixed-income research at Ping An Securities Co., said the existing credit risk mitigation tools are linked to single bonds of issuers, which differs from CDS linked to all borrowings of a debtor. There is almost no trading of credit risk mitigation tools because of that difference, he said.

— With assistance by Xize Kang, Charlie Zhu, and Judy Chen

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