U.K. life insurance companies, including Prudential and AXA Investment Managers, are looking to sell naked credit-default swaps. Pricing compares favorably with buying the underlying bonds, say the managers, but updated capital requirements issued by the U.K. regulator in the summer (DW, 6/13) pose a stumbling block to the insurers entering the market.
"Selling protection is cheaper and quicker than buying the bonds," said Manish Pabari, derivatives manager for Prudential in London, but he noted it is not clear if this is acceptable under the Financial Services Authority's latest guidelines. Prudential is still in the early stages of investigating selling credit protection, but is close to buying its first default swap, according to Pabari. The life company is looking at buying the swaps to protect its GBP30 billion (USD112 billion) bond portfolio.
"That's still a bit of a grey area [in selling protection]," agreed an institutional credit sales official at a German house. But buying protection, he explained, is appealing to both pension fund managers and life fund managers because of the liquidity offered by the CDS market. AXA was one of the first fund managers to buy CDS, and has also recently sold some of the instruments. But Jamie Grant, investment manager at AXA in London, explained AXA either had to post cash collateral or make sure the CDS sale qualified as efficient portfolio management.
Mark Chaplin, partner at Watson Wyatt in Reigate, Surrey, doesn't think using CDS to acquire risk would satisfy the new regulations in all cases. Although fund managers may look for more regulatory clarification on CDS, noted Chaplin, it is likely the FSA will consider the arguments of fund managers looking at selling credit protection on an individual basis. Robin Gordon-Walker, spokesman for the FSA in London, said life companies can apply for a waiver to the rules.
