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Derivatives

Foreign Banks Push Indian Regulator To Start Credit Mart

Banks in India, including credit derivatives heavyweights J.P. Morgan and Deutsche Bank, have begun informal discussions with the Reserve Bank of India about setting up a credit derivatives market. Rajiv Baruah, co-head of Indian global markets at Deutsche Bank in Mumbai, said "the building blocks are there." Baruah added the development of a local market would allow local corporates to transfer credit risk through credit derivative products, such as credit default swaps and total return swaps.Srinivasan Varadarajan, treasurer at J.P. Morgan in Mumbai, said his firm is in regular dialogue with regulators about developments in the Indian market, declining to elaborate. He continued that there is enormous potential for a credit derivatives market, adding that it could reach an annual notional size of USD500 million in three years. Officials at the reserve bank declined comment.

Participation certificates are currently permitted in India, which allow issuers of loans to transfer up to 40% of the counterparty risk for up to six months, but mechanisms allowing for the permanent transfer of risk are needed. "That's why the lobbying is actively taking place," added Baruah. Too much credit risk is sitting with financial institutions and the risk should be transferred to institutions looking to take on the exposure, such as corporates, asset managers, mutual funds, and insurance companies. Baruah added that other institutions are also in discussion with the regulators, declining to comment on specific firms.

One trader at an international firm in India confirmed his bank has brought this up with the RBI, declining to elaborate. Another trader in Mumbai said that a credit market could be established as early as 2002 or 2003.

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