Japanese insurers are pushing dealers to drop the restructuring clause in credit derivative contracts on domestic names and have recently sent a position paper to the International Swaps and Derivatives Association. Tokio Marine & Fire Insurance, Mitsui Sumitomo Insurance, Shinsei Bank and Sompo Japan Financial Guarantee Insurance all signed the paper, which is available on DW's Web site (www.derivativesweek.com). Tomoko Morita, assistant director of policy at ISDA in Tokyo, said it is just a question of timing as to when the Japanese credit derivatives market drops the restructuring clause for credit-default swaps.
Takeshi Gunji, manager of the credit derivatives and structured finance department at Tokio Marine & Fire Insurance Co. in Tokyo, said his firm prefers transactions which do not include the restructuring clause. As a result it either carefully studies the risks or invests in alternative products that do not contain the event, such as collateralized loan obligations.
Morita said dealers have not dropped the restructuring clause already because they are waiting for Basel to clarify its position, as if banks have to put more regulatory capital behind their loan positions they may start using more credit-default swaps to mitigate the risk. Presently, many Japanese loan houses do not hedge their positions using single name swaps as the premiums are too high, however with the increase in the amount of capital they will have to put behind loans the protection may look cheaper and they may start hedging the risk. As for the introduction of multiple holder obligations she said it would be practically meaningless to protection buyers since the majority of loans in Japan are bilateral. "Restructuring is not a big risk for them--they just want regulatory capital relief," said Morita.
Nobukazu Saeki, manager in the derivatives and structured products division at Bank of Tokyo-Mitsubishi in Tokyo, said most dealers do not object to altering contracts from three credit events to two but noted that as the market standard has been with contracts with restructuring there is fear that switching over quickly would hurt liquidity in the short run. "This will be a gradual process," he said, predicting that in twelve months the standard document could be with two credit events.
