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Derivatives

Thai Bank Eyes Credit-Default Swaps

Siam Commercial Bank, with over THB700 billion (USD15 billion) in assets, is planning to extend its investments in credit derivatives to include credit-default swaps next year. SCB is looking to sell credit-default swaps to take on exposure to businesses it does not have lending relationships with, such as non-Thai organizations. The move comes on the back of the bank wanting to diversify its portfolio because of the deteriorating credit quality of local corporates, said an official.

The bank, which has purchased credit-linked notes for about two years, will look to sell credit-default protection, likely within three to six months, according to the official. "Credit-default swaps offer an attractive yield," noted the official, adding that the yield is better than that of credit-linked notes. The bank is in the process of analyzing the International Swaps and Derivatives Association master agreements. Coming to terms with the documentation has been the main hurdle for the bank to use credit-default swaps, noted the official. The firm will likely push for contracts with modified restructuring language because it is concerned about credit events, which could occur through bilateral agreements incorporating the old restructuring language.

SCB primarily books credit-linked note purchases offshore, typically in Hong Kong and Singapore, where it invests U.S. dollars, in order to keep onshore credit lines open for other transactions, such as interest-rate derivatives. The official noted that as the central bank limits credit lines for baht transactions, it reserves the lines for domestic transactions such as money market deals and interest-rate swaps. Typical sizes of credit-linked notes and potential sizes for credit-default swaps range between USD5-25 million (notional). The official declined to comment on the total size of the investment portfolio.

"We deal with a lot of banks," noted the official. Current counterparties for derivatives products include HSBC, J.P. Morgan, Deutsche Bank and Dresdner Kleinwort Wasserstein. SCB selects counterparties on the basis of pricing and flexibility of documentation. Officials at HSBC and J.P. Morgan did not return calls. Officials at Dresdner and Deutsche Bank declined comment.

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