Capital regulation adds risk as Asia debt safety net decays

Hong Kong

DEBT crises and heavy trading losses at some Asia-Pacific companies have exposed cracks in the region's corporate debt market - suggesting a regulatory push to make the global financial system safer could unintentionally be having the opposite effect.

While primary bond markets in Asia are setting issuance records thanks to ultra-low interest rates, global banks are pulling back from the secondary and the credit derivative markets in response to more stringent regulatory capital requirements.

This pull-back is reducing market liquidity and leaving fund managers with no debt safety net, an especially difficult situation to be in when market shocks strike.

The safety net in the form of a credit default swap (CDS) allows bond holders to buy what amounts to an insurance policy: the seller of the swap contract, usually a bank, indemnifies the investor against a borrower defa…