The Australian credit derivatives market is starting to adopt the International Swaps and Derivatives Association's modified-restructuring documentation and traders in Sydney expect a concomitant pickup in liquidity. As the Australian market moves in line with global market conventions, there will be more players and more price movement, bolstering liquidity, said Pierre Katerdjian, global credit swap trader at Deutsche Bank in Sydney.
Bill Xie, credit derivatives trader at BNP Paribas in Hong Kong, estimates the weekly turnover of the Aussie credit derivatives market to range from USD30-USD100 million (notional).
"It will become the standard," added Jim Fingleton, associate director of fixed income at SG Australia. Trades executed under the new ISDA documentation carry a lower risk for the sellers of protection, and therefore likely will lead to lower margins and tighter spreads. For example, five-year credit default protection on Foster's Brewing Group was trading at 50-57 basis points under the old documentation, but 45-55bps in contracts using the revised language.
Some 10-20% of bids/offers consist of trades incorporating the new language, according to one trader, who expects them to dominate the market.
Jason Cavanaugh, head of credit trading at Westpac Banking Corp., expects liquidity to fall in the short-term but will pick up as the major players adopt the new language "sooner rather than later."
