Japanese Credit Market Drops Two Credit Definitions
The Japanese credit derivatives market has dropped obligation acceleration and repudiation/moratorium as credit events from standard default swap documentation. "We're following the global standard," said Nobukazu Saeki, manager in the derivatives and structured products division at Bank of Tokyo-Mitsubishi in Tokyo and co-chair of the International Swaps and Derivatives Association's Japanese credit derivatives committee, referring to the fact that the U.S. and Europe do not use these events.
"Basically the changes are a request from investors that don't want such ambiguous risks." Saeki said. He added, the changes will create a more standardized contract that will benefit the market: "We expect that market liquidity will increase as this change is welcomed by investors."
ISDA has been looking at changing the documentation for some time but added that Japan's regulators, the Bank of Japan and the Financial Services Agency, consented that dropping the credit events would not affect regulatory capital relief. Saeki said that market participants have agreed that the changes will become effective as of Aug. 12.
A credit derivatives head at an international house in Tokyo said ditching the two credit events will help push the market in Japan toward standardization as well as make it easier for global credit-default swap baskets to include Japanese names.