China Securities Re-Introduces Credit Hedging Tool Amid Rising Defaults

The revival of China Securities' CRMW comes at a time when the number of bond defaults is increasing.

China Securities Co, a Beijing-based brokerage, is planning to issue a credit derivative instrument, restoring an essential hedging tool against default risks as a growing number of firms struggle to pay debts in a declining economy, according to Reuters today.

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In a statement on the website of the National Association of Financial Market Institutional Investors (NAFMII), the brokerage said that the instrument called Credit Risk Mitigation Warrants (CRMWs), the Chinese version of Credit Default Swaps (CDS), will be issued in China’s interbank market.

CRMWs were initially introduced in 2010, but issuance and trading in the product was limited. The revival of China Securities’ CRMW however comes at a time when the number of bond defaults increase, fuelling demand for hedging tools.

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China’s banking regulator has said that the government will not open its treasury futures market to commercial banks anytime soon due to volatility concerns, although it admitted that banks need this market to manage risks in the longer term.

As well as bond holders, stock investors in China also suffer from a shortage of hedging tools, as regulators have restricted index futures trading following last summer’s market crash. Borrowing stocks for shorting is also difficult.

China Securities has reportedly said it will 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.


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