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Credit derivatives: China begins cautious experiment with CDS

Banks begin issuing, trading new instruments; Sources fear regulators disagree on implementation

China took a further tentative step towards the reform of its financial markets on November 5 when nine counterparties began trading onshore credit risk mitigation instruments. Since then, though, market participants have raised concerns about the way the products are being introduced and regulated. The introduction of the instruments follows new guidelines laid out by the National Association of Financial Market Institutional Investors (NAFMII), on October 29. The new products are not being called credit default swaps, presumably because CDS are too closely linked with the global financial crisis. Instead China has launched two similar products: credit risk mitigation contracts, which are non-tradable agreements between two parties, and credit risk mitigation certificates (or warrants as some are calling them), which are transferable.

The short interval between NAFMII’s announcing the new rules and the first instruments being issued indicates the urgency with which the regulator has been pushing for the establishment of the CRM market. A source involved with the process of getting approvals says that NAFMII had been consulting the market for months in the build-up to its announcement, and then encouraged banks to get the first instruments trading just one week after that date.

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