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Derivatives

Tokyo Credit Players Await Recovery Rate Swap Mart

Credit traders in Japan believe a recovery rate swap interbank market may emerge in the coming months, following recent initial forays and developments in other trading centers.

Credit traders in Japan believe a recovery rate swap interbank market may emerge in the coming months, following recent initial forays and developments in other trading centers. "This won't become commoditized but I expect it to at least become more active than first-to-default baskets," said Emmanuel Ramambason, Asian head of credit derivatives at BNP Paribas in Tokyo. He estimates this market could develop within six-to-12 months.

Dealers noted that a few deals have been completed in Tokyo this summer and expect the product to gain traction with clients. The legs of such a swap consist of a fixed recovery rate component and a variable rate, which would be settled following a credit default. A trader at a U.S. house said customers with a specific view on a company's recovery rate would be interested in such transactions.

Officials noted that while it is early days for the structure, it will likely replicate the course of other products such as credit indices, which first gained ground in the U.S. and Europe before taking flight in Japan.

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