Beijing-based brokerage China Securities Co plans to issue a credit derivative instrument, reviving a much-needed hedging tool against default risks as an increasing number of companies struggle to pay debts in a slowing economy.
The instrument, called Credit Risk Mitigation Warrants (CRMWs) – the Chinese version of Credit Default Swaps (CDS), will be issued in China’s interbank market, the brokerage said in a statement.
Chinese introduced CRMWs in 2010, but issuance and trading in the product was limited. China Securities’ CRMW issue is the first since March 2011 and comes at a time when the number of bond defaults increase, fuelling demand for hedging tools.
Earlier this week, China’s banking regulator said the government will not open its treasury futures market to commercial banks in the near future due to volatility concerns, although the regulator admitted that in the long run, banks need this market to manage risks.
In addition to bond holders in China, stock investors also suffer from a shortage of hedging tools, as regulators have restricted index futures trading since last summer’s market crash while borrowing stocks for shorting is difficult.
China Securities said it would issue CRMWs with a notional value of 800 million yuan ($120.03 million), while the underlying debt for the CRMW are asset-backed securities issued by a trust company.
China Securities posted the statement on the website of the National Association of Financial Market Institutional Investors (NAFMII).