CHICAGO - There has always been a tension in emerging markets between economic growth and the sense that unfettered capital—particularly from overseas—will somehow ravage the local unsophisticates. That tension has been playing out recently in India and China as the two are essentially dormant in credit derivatives.
Regulators in both countries have made concessions to dealers looking to kickstart credit trading this week. The Reserve Bank of India released its final guidelines, allowing restructuring as a credit event, relaxing capital adequacy requirements and easing some controls around the naked CDS ban for end users. The China Banking Regulatory Commission circulated a set of draft guidelines to banks concerning credit derivatives and acknowledging that they intend to allow them to provide capital relief. The China step, while less official in nature, will have a far greater impact as it is the first time the CBRC has even acknowledged the existence of the fledgling market since it kicked off in November.
Both have seen several false potential starts in recent years as regulators change their minds or present guidelines too strict to allow any economic benefit to the trade. The compromises, while small, signal a shift in the mentality of regulators who have previously been looking to ignore international standards in favor of onshore models.
That of course is understandable given the pummeling credit derivatives have taken from pols and the media for the developed world credit crisis. Dealers will probably have to grapple with that history for some time yet.
