China has postponed a plan to introduce credit default swaps to its domestic market after regulators objected and senior officials vetoed the proposal following discussion over the derivatives’ contribution to the global financial crisis.
The plan to launch a CDS pilot project in China was advanced and enjoyed preliminary support from the central bank. But other regulatory bodies, including the banking watchdog, were opposed at a time when governments are attempting to rein in the market for complex credit derivatives.
Credit default swaps, a kind of insurance policy against a bond defaulting, have been blamed by regulators for exacerbating the financial crisis.
The barely regulated market allows traders to hedge their credit portfolios, but the markets accuse speculators of profiting from the problems of companies and governments.
In an attempt to make the products more palatable to regulators, supporters of the pilot project, led by the National Association of Financial Market Institutional Investors (Nafmii), changed the Chinese name for CDS to “credit risk mitigation contracts”.
But this failed to convince regulators, who argued that China’s bond market was too immature and under-developed to introduce the credit derivatives.
Germany has announced a ban on “naked” short selling in German stocks, eurozone government bonds and credit default swaps linked to these bonds.
According to a person familiar with the matter, the planned Chinese pilot scheme would not allow “naked” CDS sales, when traders buy insurance on bonds they do not own.
If it goes ahead, China’s CDS pilot project would fail to be introduced until the end of the year at the earliest and would be very limited in scope, according to people familiar with Beijing’s thinking.
“The government might allow a very small pilot project to go ahead, so we can start to learn about them and see what happens,” one person said.
A western banker involved in discussions on the topic said the introduction of CDS at this point in the development of the country’s bond markets would be “absurd” and would amount to “toys for boys” for the departments promoting them.
“The introduction of a CDS pilot project by the end of this year is a very optimistic timeframe in my opinion,” said another western banker who advises the Chinese government on securitisation and CDS development. “Most people expect this won’t actually happen for another three or four years.”
A tiny pilot project for securitisation of bank assets that was launched four years ago had barely got off the ground before the financial crisis hit and it was put on ice.
