Credit default swap

Financial terms

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Credit default swap (CDS) is foreign bond market The most common Credit derivatives 。^[1] In fact, within a certain period of time, both the buyer and the seller carry out the specified credit event Risk conversion A contract for. credit risks The protected buyer regularly pays the credit risk protected seller for a reference entity's credit event during the contract period or before the credit event, in exchange for compensation after the credit event^[2] 。

In case of credit default Swap transaction In, the buyer of default swap will pay a certain fee (called credit default swap point difference) to the seller of default swap on a regular basis. In the event of a credit event (mainly refers to the inability of the bond subject to repay), the default swap purchaser It will have the right to deliver the bonds to the seller of the default swap at face value, so as to effectively avoid credit risk. Due to credit default swaps Product definition Simple, easy to realize standardization, and simple transactions.

Since the 1990s financial products Developed abroad financial market It has developed rapidly. And gradually promoted in the world.

Chinese name: Credit default swap
Foreign name: credit default swap
Properties: term

Abbreviations: cds
main features: High leverage
Classification: Credit derivatives

catalog

▪ advantage
▪ shortcoming

Historical evolution

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On March 24, 1989, Exxon's cruise ship Valdez Valdez, USA Alaska The Prince William Sound hit the rocks in the following days, which led to environmental disasters. Initial judgment of the court Mobil Loss of $287 million damages And a fine of $5 billion. Mobil therefore hopes to JPMorgan Chase The bank received $4.8 billion Credit line 。 JPMorgan Chase Bank faces a dilemma. On the one hand, it needs to maintain its relationship with Mobil Customer relationship It is not convenient to refuse Mobil. On the other hand, Basel I regulations stipulate that banks need to credit risk Prepare 8% risk reserve. JPMorgan Chase Bank came up with an alternative at the end of 1994: JPMorgan Chase Bank's early payment EBRD A premium, and it is agreed that if Mobil defaults on payment, EBRD will compensate JPMorgan Chase Bank. So the Mobil held by JPMorgan Chase Bank credit risks Was transferred to the European Bank for Reconstruction and Development, thus avoiding the high Risk reserve 。 At that time, such an arrangement did not have a financial name. It was later called CDS^[2] 。

Principle analysis

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stay bond market If investors buy bonds, they will face two risks. One is the default of the entity to which the bonds are attached, including bankruptcy Debt restructuring And so on, which made it impossible to pay his principal and interest within a certain time; The second is caused by the rising of the benchmark interest rate of the market Bond price The decline of. in order to Risk avoidance One of the solutions is to buy insurance and obtain compensation after the event through the advance premium^[2] 。

CDS is similar to insurance, as shown in CDS purchaser (i.e. the party that purchases credit risk protection) can obtain compensation after the credit risk of the reference entity occurs. But in practice, there are great differences between the two. In terms of regulatory requirements, the regulatory ratio of CDS Insurance Weak; In Reference Subject matter On the one hand, CDS can be dissociated from the subject matter, that is, credit risk protection buyers can trade CDS without holding reference bonds; In addition, taking automobile insurance as an example, after an accident, the car insurance policyholder who has received compensation does not care about the car price of end-of-life vehicles, while after the CDS credit event, the price of reference bonds is still the concern of CDS buyers^[2] 。

Basic classification

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CDS can be classified according to different dimensions. For example, according to different reference entities, they can be divided into enterprise or sovereign categories. The sovereignty here can be a country, or a political institution of the government, a central bank, etc. Enterprises in the current reference entities account for approximately the total CDS Nominal principal 70% of the total^[2] 。

CDS can also be classified according to the number of reference entities. Like above Mobil In the case of, the reference entity is only Mobil, which is a single entity, known as CDS with a single name. The opposite is multiple names CDS, which Underlying assets It is a combination, such as a group of Corporate bonds Debt formed for underlying assets, or index composed of multiple single name CDS^[2] 。

CDS can also be classified according to the basic assets, such as Corporate issuance As the basic asset, the debt of the company is enterprise debt. with Asset backed securities It is called ABCDS. There is also LCDS with syndicated credit as the underlying asset^[2] 。

Protocol framework

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ISDA The General Agreement on Credit Derivatives Contracts was released, providing an overall framework for CDS transactions. The main contents of CDS trading contracts include the following aspects: reference entities; Reference debt; Time limit of the contract; Definition of credit events; After the credit event, there are three ways to settle the transaction contract: physical settlement, auction settlement and cash settlement^[2] 。

main features

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CDS is characterized by high leverage. Unlike the purchase of bonds, early investment CDS does not require or only requires a small amount of capital investment. One reason is that the buyer only needs to pay the coupon quarterly to protect the seller, while the seller only needs a margin account.^[3]

The trading of CDS is not restricted by the supply of bonds. So in the market, CDS Nominal principal Far more than Underlying assets The principal of.^[4]

Advantages and disadvantages

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advantage

The advantage of CDS is to increase the market Credit funds 。 At present, China's banks are the main providers of market funds, but because of their own risk management . There are restrictions on various indicators, so there are Be reluctant to lend Phenomenon, unwilling to lend abroad. Through the above JPMorgan Chase As can be seen from the case of banks, CDS can enable banks to credit risk Release.

CDS provides funds lenders with credit risks The transfer channel of is favorable for banks to adopt precise risk management tool Without selling credit, bonds or frequent replacement Portfolio 。 Through off table support, you can Asset size On the premise of reducing credit risk. This is not only for banks in China who are still pursuing scale, but also want to reduce credit risk management philosophy , can be regarded as a good application tool.

As the buyer of CDS actually provides insurance for the reference entity, weak rating companies provide guarantee measures for their lenders by providing CDS, which can indirectly cost reduction Financing. It is reported that recently Shanxi Financial Office Prepare to build Shanxi Credit enhancement Investment company, through CDS Shanxi Province Credit enhancement and expansion of coal enterprises Bond financing This is the way. In addition, due to its scale Liquidity It is significantly higher than the reference bond, so it can give cash bonds holder Provide a guarantee channel to better manage the risk of bonds held.

Especially in the perfect financial market Medium, identify risk financial instruments essential. If you can only be long, not short, the market asset bubble It is difficult to find that once it falls back, the amplitude will be more intense. Coupon and interest pairs of CDS Market information More dynamic. The study found that CDS coupon is more able to reflect the risk changes of the reference entity than the ratings of rating companies. Because CDS provides more agile cash coupons Price discovery Therefore, the cost of credit risk of hedging cash bonds is reduced, and the price of cash bonds can be kept within a reasonable range.^[5]

shortcoming

The main disadvantage of CDS is that the buyer of CDS still maintains the discourse power , especially if the reference entity goes bankrupt or Debt restructuring This disadvantage is more obvious.

Another disadvantage of CDS is bare space. Research on the financial market crisis in 2008 found that 80% of CDS contracts were naked. After the crisis, the EU market has begun to prohibit naked speculation.

Although CDS can increase the investment of market credit funds, some people believe that it will encourage banks to increase their investment in high-risk The loan of the project will reduce the loan quality, and it is easy to urge the bank to relax the post loan tracking moral risk 。

CDS is offsite Bilateral transactions , lacking exchange The product is standard and has significant Counterparty risk 。 After the crisis, the regulatory authorities began to strengthen the central government Clearing Center , greatly controlling counterparty risk market size And potential risks have been monitored in a timely manner.

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