The Japanese credit derivatives market started to quote credits with the International Swaps and Derivatives Association's modified restructuring language Monday, after most dealers had agreed on this date. Market makers expect this to boost end user participation and Manabu Yokitomo, deputy manager of credit derivatives and structured finance at the Tokio Marine & Fire Insurance Co. in Tokyo, validated their claims. He said, "we're hungry for Japanese names and will look to invest as soon as the modified restructuring language is common," said Yokitomo. "We'll be more comfortable in investing in Japanese names [under the new language]," added Yokitomo. The insurer already sells credit protection in Japan and uses the modified language on U.S. and European names.
The restructuring clause was agreed on at ISDA's annual general meeting in May and makes several changes, such as excluding restructuring in connection with bilateral loans as a credit event. Ralph Orciuoli, managing director and head of structured credit products at Bank of America in Tokyo, said it has taken until now to start trading contracts with the new clause because Japanese banks want to keep the old one as they have a lot of exposure to bilateral loans. "Give it a month or so for the market to digest the new prices and modified restructuring language. Then I expect it to follow the rest of the Group of Seven markets, where the modified restructuring language dominates the market," said Terry Koh, v.p. of credit derivatives trading at J.P. Morgan in Tokyo.
Orciuoli said the market was split on Monday, some firms pricing primarily in the new language while others priced credits traditionally. "It's being done trade by trade, dealer by dealer, many trying to make any documentation difference in their favor," added Orciuoli. He continued that his strategy in the weeks to come would be to offer protection in modified restructuring language on names that he had purchased in the old language, netting a difference in the documentation.
Tomoko Morita, assistant director of policy for Japan at ISDA in Tokyo, said the organization intends to address the possibility of a modified restructuring language tailored specifically for the Japanese market, especially concerning bilateral loans for Japanese banks, in a meeting in November.