China delaying credit default swaps project

CHINA has delayed a pilot project to trial credit default swaps (CDS) in its domestic bond market after the national banking regulator expressed concerns over their side-effects.

CDS, derivatives that provide insurance against a bond defaulting, have been blamed for amplifying the financial crisis as their use spread from hedging credit portfolios to speculating. It is understood the China Banking Regulatory Commission, as well as other regulators, feared China’s bond market was too young to deal with the implications of complex debt derivatives.

The decision comes at a time when instruments such as CDS are in the spotlight. A fortnight ago Germany shocked world markets by banning “naked” short selling – selling an asset without owning or having borrowed it – on German stocks, Eurozone government debt and CDS linked to Eurozone countries’ bonds.

A trial of credit default swaps could now take between three to four years to appear.