National Australian Bank and Commonwealth Bank of Australia will substantially increase their credit derivatives trading activities this year because they are seeing greater customer demand and improving liquidity in the nascent market, according to officials at the banks. NAB has recently received regulatory approval to actively trade credit derivatives and CBA expects to receive the okay in the coming months. "We hope to receive approval before the end of the fiscal year," said Fergus Gilbert, head of credit trading at CBA in Sydney, noting that the fiscal year end is June 30.
Currently the banks use credit default swaps to hedge their loan books but are also sellers of credit protection in a limited capacity. "We'll be starting this very soon," said an official at NAB in Melbourne, adding that the bank has recently received trading book status from the Australian Prudential Regulation Authority. Gloria Peterson, spokeswoman at APRA in Sydney, said the regulator has a secrecy provision with the banks it regulates, declining further comment.
"This will allow us to better facilitate customer demand," said the official at NAB, adding that more clients continue to eye the nascent market as liquidity increases.
The bank will start market making in the coming weeks and expects to increase its use of credit derivatives by 50% this year, to several trades a week. He declined to elaborate on the expected size of the trading book.
CBA plans to expand its activity, to "ultimately parallel that of what we do in our vanilla corporate bond book," Gilbert said. He declined to reveal the size of the book. Liquidity in the Aussie credit mart should pick up, as these domestic banks become more active upon receiving permission from the regulators. "This will definitely help the market," added Gilbert.
"We're extremely happy," said Pierre Katerdjian, global credit swap trader at Deutsche Bank in Sydney. "New players means more pricing, more curves, more opportunities, more liquidity," added Katerdjian. "With more domestic banks trading, the basis spread between domestic corporate bonds and credit default swaps should start to narrow, bringing it closer to parity," he noted.