Market makers expect highly rated corporates to flood into the credit derivatives market as both end users and market makers if the proposed Basel Capital Adequacy Accord comes into effect.
The Basel Committee on Banking Supervision last Tuesday issued a "more concrete proposal" for a new Basel Capital Accord that in 2004 will replace the 1988 Accord.
Under the proposed shake up of the rules, corporates with high credit ratings--and their bank counterparties--will be required to set aside less capital against loan positions.
The head offices of General Electric, Unilever and ABB would be among the first to enter, predictsAndrea Fabbri, deputy head of credit derivatives at Banca Commerciale Italiana in Milan. This is because these companies have some of the most sophisticated treasury departments and have credit exposure to a wide range of industries. Other bankers agreed that these companies would likely be in the vanguard of entrants, adding that to their knowledge none of the three have used credit derivatives before, although their subsidiaries have. Officials at the companies declined comment.
Douglas Long, head of quantitative research and development in Europe at Principia Partners in London, said, "There are huge potential opportunities for corporates to come into the market and reduce spreads." More liquidity in plain vanilla credit derivatives could spur banks to offer more exotic options, he added.
Under the new proposal, corporates rated A-minus or better will have lower risk weightings (see chart) than under the current system, explainedClaude Brown, partner at Clifford Chance in London. At the moment all corporates are 100% risk weighted and all Organisation for Economic Co-Operation and Development-based banks are 20% risk weighted.
The Basel Committee is seeking industry comment until May 31 and expects to complete the final version by year-end. The first consultative paper was published in June 1999.
