| HONG KONG
HONG KONG Dec 21 Credit default swaps in Asia
will now follow a standardised trading format designed to
facilitate centralised clearing, improve transparency and in
the long-run raise transaction volumes, a trade body said on
From Monday on, CDS or insurance-like contracts that
protect against defaults and restructuring, will adopt standard
coupon sizes and the payment of full first coupons, the
International Swaps and Derivatives Association said in a
following similar changes in Europe and North America
Entities in Japan will now trade CDS with standard coupons
of 25 basis points (bps), 100 bps and 500 bps and full first
coupons going forward.
In the rest of Asia CDS will adopt standard coupons of 100
bps and 500 bps and full first coupons going forward, said
ISDA, which represents participants in the privately negotiated
The move follows similar changes in Europe and North
America earlier this year.
"The purpose of creating standardised contracts is it
concentrates liquidity and that should facilitate the move to
central clearing," said Keith Noyes, ISDA Regional Director,
"Pricing will become more transparent and liquidity may
increase as everyone is quoting the same thing," he told
Under the current system, single-name CDS contracts trade
at a par spread -- the level that makes the contract's value at
the outset equal to zero for both the buyer and seller of
The new convention will instead fix a coupon at the outset
of a contract.
For example, a CDS now quoted at 150 basis points would be
quoted with a coupon of 100 basis points plus an additional
upfront payment equal to the 50 basis points.
The fixed coupon and variable price make it easier for the
dealer or central counterparty to match trades on the same
underlying name, even though they are executed at different
times and at different spreads.
"We have not seen any notable impact from the changes
themselves but over the longer term this will help liquidity
and trade volumes," said Richard Cohen, Head of Credit Trading
Asia Pacific for Credit Suisse.
The U.S. market took the lead in adopting the new trading
conventions in early April but with only two available coupon
options at 100 and 500 basis points.
Europe followed in June with four coupons for new trades
and two other coupon options to remake existing trades. The two
other coupons are 300 and 750 bps.
"The ISDA changes do make clearing easier as they
standardise contracts. They would definitely make
exchange-based trading a lot easier as well," Cohen said.
Markit, a data provider and index administrator, said the
spread widening on many sovereigns makes the move a timely one
as standardisation reduces risk.
"The trading of CDS contracts is a global phenomenon and
greater standardisation promotes greater operational efficiency
and reduced systemic risk," it said in a note.
(Editing by Tomasz Janowski)