China’s Interbank Market Upgrades Credit Derivatives Rules


The peak body for participants in China’s interbank market has issued new rules updates with the goal of improving the use of credit derivatives to mitigate risk.

The National Association of Financial Market Institutional Investors (NAFMII) recently issued the amended versions of the “Interbank Market Credit Risk Mitigation Tool Trial Operating Regulations” (银行间市场信用风险缓释工具试点业务规则) and the accompanying “Credit Default Swap Operating Guidelines” (信用违约互换业务指引) and the “Credit-linked Notes Operating Guidelines” (信用联结票据业务指引).

NAFMII said that improvements to the CRM system are expected to “stimulate the vitality of the market, further improve mechanisms for the dispersal and sharing of credit risk, expedite the healthy development of the credit derivatives market, and raise the effectiveness and ability of financial derivative products to service the real economy.”

CRM tools first made their debut in China on 29 October 2010, with the release of the first iteration of the “Interbank Market Credit Risk Mitigation Tool Trial Operating Regulations” by NAFMII.

At the time these instruments primarily assumed the form of credit risk mitigation agreements (CRMA) (信用风险缓释合约) and credit risk mitigation warrants (CRMW) (信用风险缓释凭证), which are akin to credit default swaps.

In 2016 NAFMII further added credit default swaps (CDS) and credit-linked notes (CLN) (信用联结票据) to the line up of CRM tools.

Researchers from China International Capital Corporation (CICC) say that CRM are playing an extremely important role in the development of China’s domestic debt market, as they strengthen the effectiveness and accuracy of pricing mechanisms for credit risk, provide more tools for hedging and dispersing credit risk, as well as raise the liquidity of the debt market.

The CRM market nonetheless remains at an incipient stage of development, with inadequate liquidity levels and poor ability to play a risk-hedging role.

Data from NAFMII indicates that as of the end of 2020 there were a total of CRMW institutions, 48 CLN institutions, as well as 60 primary CRM dealers and 98 standard dealers that have completed registration procedures.

Commercial lenders and securities firms have emerged as key players on China’s CRM market, with all six of China’s big state-owned banks completing filing to serve as CRMW and CLN institutions.

Efforts to spur the development of CRM arrive just following a spate of defaults on China’s bond market in 2020 during the peak of the COVID-19 pandemic.

2020 saw a total of 30 issuers default on 97 bond issues, with a total default sum of 100.255 billion yuan