Financial Regulatory Forum

New credit default swaps system to help volumes, liquidity in Asia – trade body

By Reuters Staff
December 21, 2009

By Umesh Desai

HONG KONG, Dec 21 (Reuters) – Credit default swaps in Asia will now follow a standardised trading format designed to facilitate centralised clearing, improve transparency and in the long-run raise transaction volumes, a trade body said on Monday.

From Monday on, CDS or insurance-like contracts that protect against defaults and restructuring, will adopt standard coupon sizes and the payment of full first coupons, the International Swaps and Derivatives Association said in a statement.

The move follows similar changes in Europe and North America

Entities in Japan will now trade CDS with standard coupons of 25 basis points (bps), 100 bps and 500 bps and full first coupons going forward.

In the rest of Asia CDS will adopt standard coupons of 100 bps and 500 bps and full first coupons going forward, said ISDA, which represents participants in the privately negotiated derivatives industry.

The move follows similar changes in Europe and North America earlier this year.

“The purpose of creating standardised contracts is it concentrates liquidity and that should facilitate the move to central clearing,” said Keith Noyes, ISDA Regional Director, Asia Pacific.

“Pricing will become more transparent and liquidity may increase as everyone is quoting the same thing,” he told Reuters.

Under the current system, single-name CDS contracts trade at a par spread — the level that makes the contract’s value at the outset equal to zero for both the buyer and seller of protection.

The new convention will instead fix a coupon at the outset of a contract.

For example, a CDS now quoted at 150 basis points would be quoted with a coupon of 100 basis points plus an additional upfront payment equal to the 50 basis points.

The fixed coupon and variable price make it easier for the dealer or central counterparty to match trades on the same underlying name, even though they are executed at different times and at different spreads.

“We have not seen any notable impact from the changes themselves but over the longer term this will help liquidity and trade volumes,” said Richard Cohen, Head of Credit Trading Asia Pacific for Credit Suisse.

The U.S. market took the lead in adopting the new trading conventions in early April but with only two available coupon options at 100 and 500 basis points.

Europe followed in June with four coupons for new trades and two other coupon options to remake existing trades. The two other coupons are 300 and 750 bps.

“The ISDA changes do make clearing easier as they standardise contracts. They would definitely make exchange-based trading a lot easier as well,” Cohen said.

Markit, a data provider and index administrator, said the spread widening on many sovereigns makes the move a timely one as standardisation reduces risk.

“The trading of CDS contracts is a global phenomenon and greater standardisation promotes greater operational efficiency and reduced systemic risk,” it said in a note. (Editing by Tomasz Janowski) ((umesh.desai@thomsonreuters.com; +852 2843 6935; Reuters Messaging: umesh.desai.reuters.com@reuters.net; ))

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