CDS market faces headwinds in China
MVA: swaps scale new heights in complexity
UBS saves Sfr295m in capital via swaps margin change
COMMENTARY: The dangers of fragmentation
China's financial regulators are making a second attempt to kickstart a credit derivatives market. The failure of the existing credit risk mitigation (CRM) products to take off has led them to try something closer to the credit default swaps used elsewhere in the world. But the main reason for the failure may not have been the CRM structure, but the country's fragmented regulatory system, with different industry watchdogs even proposing different versions of the master agreement.
It's bad enough that, with Chinese corporate credit risk (and default rates) rising, the country still lacks a liquid and functional credit derivatives market. So much Chinese corporate credit is issued by companies that are state-owned or state-backed that it is probably not going to function like anything recognisable to the rest of the world any time soon. But the number of different regulators involved, and the apparent lack of crosstalk between them, is a sign of a much more worrying problem.
One of the more remarkable aspects of the 2008 financial crisis was the amount of regulatory arbitrage it revealed – not only between countries, but even within them, with the US Office of Thrift Supervision failing to spot the flaws that led to the downfall of many of the huge institutions it was supposed to be overseeing, including AIG, IndyMac, Countrywide and Washington Mutual. While there seems to be less potential for this sort of venue-shopping under the Chinese system, which is fairly rigorously divided by industry, the lack of effective co-operation between regulators over the credit market issue is concerning.
The Chinese central government, in most areas of policy, seems to take a fairly mission-command approach, giving subordinates general objectives and leaving them alone to get on with it – often in competition with each other – and rewarding or punishing them later depending on results. Whatever the benefits of this strategy elsewhere, it risks disorder and disaster if applied indiscriminately in financial regulation. If the false steps over credit derivatives are a sign of a broader disconnect between China's many financial watchdogs, it could be an extremely worrying sign.
STAT OF THE WEEK
QUOTE OF THE WEEK
"We think it's good practice to hold ourselves accountable to the same high standards we impose on the institutions we supervise" – Linda Cunningham, chief risk officer at the US Office of the Comptroller of the Currency
ALSO THIS WEEK
Banks take flexible approach to pricing netting risks
Dealers are adjusting CVA prices, depending on their view of the legal netting opinion
EU non-cleared margin rules tipped for February
Regime likely to begin earlier than mid-2017, say regulatory sources
Bank stress and Brexit drive DoubleLine out of European credit
Fund manager warns ECB's corporate bond buy-backs may produce "adverse outcome"
Sense and sensitivities: Isda Simm is not so simple
Three industry experts argue the Simm won't work without centralised calibration of sensitivities
Why not having AAD needn't be the end of the world
Optimisation method offers quicker and more focused way of making XVA calculations
Bond funds use derivatives to buy time for bargain hunting
Buy side turning to ETFs and CDSs to meet exposure targets, switching them for bonds later on
The P&L attribution mess
Seven months after new market risk capital rules were finalised, regulators and lobbyists are still locked in discussion over one of its key elements - the result of a mysterious eleventh-hour change to the text
Banks fear FRTB internal model approval gridlock
UK regulator said to have concerns about the high volume of simultaneous approval requests
Eurozone must lead search for doom-loop fix
Basel Committee working on sovereign risk, but eurozone has most at stake
Model firms vie to pinpoint ‘X factor' in private equity, property
Difficulties gathering data plague efforts to determine correlation between private and publicly traded assets
Data muddle fears follow EC adoption of key Mifid RTS
Industry wants to avoid the emergence of multiple identifiers and is worried ISINs will not be adopted globally for derivatives