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China said to have started credit-default swap trading on Monday
[SHANGHAI] Faced with mounting bond failures, China has started trading of credit-default swaps on the nation's interbank market.
Trading began Monday, people familiar with the matter said, asking not to be identified because the authorities haven't disclosed the information. The move comes after separate people close to the matter said in September that the nation's central bank had approved such trading by financial institutions.
The swaps, which provide insurance against nonpayment on bonds, can help investors hedge against credit risks after 21 securities defaulted this year, compared with only seven in 2015. There is room for failures to rise after Premier Li Keqiang pledged to weed out zombie companies even after the economy grew at the lowest pace in a quarter century.
Authorities issued rules on bond default hedging instruments called credit risk mitigation warrants in 2010, with National Association of Financial Market Institutional Investors saying at the time that products must focus on specific underlying debt. Shi Lei, head of fixed-income research at Ping An Securities Co, said in June there was almost no trading of those tools because the instruments are linked to single bonds of issuers.
Industrial Bank Co and Bank of China Ltd. were among the first institutions that conducted CDS transactions on Monday, using China United Network Communications Ltd's bonds as underlying debt, said one of the people. Bank of Shanghai Co and Bank of Communications Co also completed a deal, said the people. The underlying securities for that deal were bonds issued by China Petroleum and Chemical Corp, said one of the people.
A public relations official at Industrial Bank said the bank had no immediate comment. Two calls to Bank of China's press office went unanswered. A public relations official at Bank of Shanghai said the bank had no immediate comment. A press official at Bank of Communications couldn't immediately comment.
A press official at the China Foreign Exchange Trade System, regulator of interbank market trading, wouldn't comment.