Credit-default-swaps with two credit-event triggers started trading in Japan last week, a move which is being pushed by domestic sellers of protection and local houses such as Nomura Securities and Bank of Tokyo-Mitsubishi. These contracts can only be triggered if the reference entity goes bankrupt or fails to pay an obligation, the so-called soft credit event of restructuring does not apply. "Most investors prefer two credit events," said a trader at Nomura, noting that last Monday the domestic houses began quoting trades in the contracts.
Prominent end users in Japan, including Shinsei Bank and Tokio Marine & Fire Insurance have been lobbying in recent months to drop the restructuring credit event (DW, 2/23). The trader at Nomura continued that with the market adopting the International Swaps and Derivatives Association's 2003 credit definitions on June 20 (DW, 5/25), it was an opportune time to introduce two credit event default-swaps. "We needed a turning point and with the new definitions being implemented, we have a chance," he added. "Honestly speaking, I hope that a two event market will be established but right now it's too early to decide if it will take off," said Nobukazu Saeki, manager in the derivatives and structured products division at Bank of Tokyo-Mitsubishi in Tokyo.
Credit derivative traders estimated the two-event contracts accounted for 20-30% of all default-swap trading activity. Much of the interest is on major corporates such as Sony and Hitachi. Dealers at international houses were mixed on the possibility of trading without the restructuring event. "If this is where the liquidity is at, then we'd be glad to switch over," said one trading head. "Personally, I don't think two [credit event contracts are] good for the market," said one credit trader, adding, "It will further exaggerate the imbalance between supply and demand--you'll see even less buyers of protection for two credit events."
