New benchmark contracts for US$17t credit swap mkt

[LONDON] The biggest overhaul of the global credit derivatives market started on Monday with new benchmark contracts addressing flaws that prevented some bondholders from being fully compensated for losses.

The shake-up of the US$17 trillion credit default swap market increases the cost of insuring junior bank bonds and sovereign debt because new contracts offer investors greater protection. The benchmark for swaps linked to high-yield borrowers is also being broadened to reflect the growth of the junk bond market.

Greece's debt restructuring in 2012 and the Dutch government's seizure of lender SNS Reaal NV's bonds in February 2013 prompted changes to the contracts. The list of events triggering payouts has been expanded to include bail-ins, where investors are forced by regulators or governments to contribute to bank rescues.