Macro-Finance Salon (No. 41): Past and Present of CDS and Its Application in China
2016-11-12 IMI
Dr. Fan Xiwen explained the basic situation of CDS in detail and described the characteristics of CDS from the perspective of credit, risk, target and its impact on basic assets, and offered several suggestions to CDS’s application in China by analyzing what CDS in the US has brought to the financial market.
Dr. Fan pointed out that CDS is a revolutionary tool in the financial market, it isolates the risk from liquidity, the trading parties make transactions based on CDS credit risk. In his view, CDS is a derivative, but in fact is not limited by the underlying asset stock, in a morally imperfect market there may appear empty shell credit problem, there are also counterparty risks, which may easily lead to systemic risk. At the same time, CDS is also a hedge bond risk of financial instruments, and can precisely reflect the basic situation of basic assets. Speaking of the impact of the US CDS on the financial crisis, he pointed out that the combination of regulation and financial markets makes pre-crisis CDS risk premium at a very low level for a long time, and thus cannot mirror the market system risk aggregation. A series of issues ranging from pricing to recovering to supervision must be addressed before applying CDS in China.
Liu Qingsong, former division chief of CBRC Henan Branch, put forward that CDS is a double-edged sword. In principle, it can achieve the risk of isolation and transfer, but in fact it does not change the risk of underlying assets. In the process of risk transfer, risks may spread and increase. So how to solve such a contradiction is a problem that needs to be considered in the process of exploration. He stressed that China needs to improve the relevant laws and regulations, including the accounting system, tax system, market norms, to promote diversification of participants and trading products diversification, improve market transparency and effectiveness of information disclosure, and promote open regulation, and thus establish a real CDS market.
Tu Yonghong, deputy director of IMI, suggested that from the perspective of China's deepening financial system reform, the purpose of restarting CDS is to establish risk transfer mechanism, promote RMB internationalization and clear the bubbles in domestic real estate. To achieve these goals, it is necessary to better design CDS products that clearly identify risks, while promoting regulatory reform and enhance education in these areas.
Wang Wei, director of Fixed Income Research Department，Bank of China International (Hong Kong), pointed out that CDS hedging tools gradually derived as an investment tool, in fact, there are many potential risks. He believes that China needs to make clear CDS positioning and related provisions to ensure the equality of its operation by laws and regulations.
