Japanese credit derivatives houses are likely to write their own definition of restructuring as a credit event--which would be the third such definition simultaneously in use by the industry--if a global consensus cannot be reached on whether restructuring bilateral loans counts as a credit event, according to bankers in Tokyo. Approximately 60% of corporate debt in Japan is in the form of loans, most of which are bilateral, whereas in the U.S. bonds outnumber corporate loans by a ratio of 4:1. The U.S. market standard definition, the so-called "modified restructuring" definition, excludes restructuring loans held by less than three parties as a credit event and a new standard European players are developing would also exclude bilateral loans.
The exclusion of bilateral loans is not acceptable to the Japanese credit derivatives market. "Banks in Japan want to get rid of this multiple holder requirement as it forbids bilateral loans," said a credit derivatives head.
One European credit derivatives professional said it would not be a problem if the Japanese market adopts a different restructuring definition because credits traded in Tokyo are not necessarily the same as those traded in Europe and the U.S. However, the multiplicity of definitions would be a problem if a firm has multiple positions on the same credit via contracts that incorporate different definitions of a credit event, he added.
"If market participants fail to agree to a global standard then each region may have its own standard," said Nobukazu Saeki, manager in the derivatives and structured products division at Bank of Tokyo-Mitsubishi in Tokyo and co-chair of International Swaps and Derivatives Association's Japanese credit derivatives committee. Credit derivatives professionals in Japan are working with their counterparts from other markets to bring out a standardized "modified modified restructuring" (MMR) language. "Our first priority is to work on a standard [definition]," said Saeki. It will likely take over six months before a resolution is found.
Junichi Kamei, policy director and head of the Tokyo office at ISDA, said the ideal solution is that restructuring is dropped as a definition of a credit event for the purposes of regulatory capital relief. Tomoko Morita, assistant director of policy for Japan at ISDA in Tokyo, expects this to be one of the main issues at the credit derivatives subcommittee meeting later this month.
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