If you still find it hard to understand, explain it with the production process of the world's first CD:

1993, Exxon faced a fine of $5 billion due to the oil spill from the tanker. Exxon approached its old financial customer, Bank of JPMorgan Chase, and asked for a loan. However, this kind of loan has only a very low profit. If you borrow it, you won't earn much. The key point is that it will occupy the credit line of Morgan Bank, and the bank will set aside a large capital reserve for this loan.

At that time, JPMorgan Chase was worried about the credit limit of the loan. Because of the Basel Capital Regulation 1988, all banks must keep 8% of the total bank loans on their books: for every 100 dollars lent, they must keep a reserve of 8 dollars.

J.P. Morgan thinks this clause is quite unreasonable, because its loans are aimed at reliable corporate customers and foreign governments, and the default rate is very low. It seems to be a complete waste of resources to keep a reserve of $8 for every $65,438+000 lent. Because the loan risk in JPMorgan Chase is close to zero, and the rate of return is very low. In this way, JPMorgan Chase felt the crisis of business development.

How to lend this money without affecting J.P. Morgan's credit line? The financial derivatives department of Bank of JPMorgan Chase has come up with a solution. They found an official of the European Bank for Reconstruction and Development, and proposed that the European Bank for Reconstruction and Development should pay a certain fee every year, and at the same time, the European Bank for Reconstruction and Development should bear the credit risk of Exxon's loan, thus effectively ensuring that JPMorgan Chase's loan is risk-free.

If Exxon fails to repay the loan, EBRD will bear the losses of JPMorgan Chase; However, if ExxonMobil hadn't defaulted and repaid the loan, EBRD would have made huge profits.

The European Bank for Reconstruction and Development thinks that a big company like Exxon has zero possibility of default, so it will earn a guaranteed commission. So I agreed to the deal. According to the financial derivatives trading scheme at that time, although the loan was lent to Exxon, it was risk-free. Therefore, the internal credit line of JPMorgan Chase will not be affected.

JPMorgan Chase paid a small insurance premium and obtained an additional credit line of $5 billion. This credit line originally needed $400 million in capital support, but JPMorgan Chase did not prepare $400 million for it.

Facts have proved that this invention has brought benefits to all parties. Exxon got the loan, JPMorgan Chase got the interest income, and EBRD easily got the insurance commission. Credit default swaps (CDS) have thus gained market recognition.

Why does China need CDS?

Analysts such as Guan Qingyou and Li Qilin of Minsheng Securities believe that credit risk events occur frequently in the bond market. Interrupt exchange? It is accelerating, and the market needs risk diversification tools very much. As long as the defects of tools are gone, CDS will develop rapidly.

Taking steel, coal, cement and other typical industries as examples, credit spreads have expanded rapidly since June 20, 200511. At present, the credit spreads of coal, steel bonds and bonds with the same grade and maturity are about 200BP and 170BP respectively, which enhances the risk coverage.

Cooperate with debt-to-equity swap and asset securitization to resolve non-performing assets of banks. Solving the non-performing assets of commercial banks includes two aspects: one is to dispose of the non-performing assets that have been precipitated; The second is to prevent the formation of new non-performing assets. In essence, these two aspects can also be attributed to the lack of credit, and the development of credit derivatives CDS will help solve these two problems.

Minsheng Securities said, ease the bank? Unwilling to borrow money? Revitalize bank assets. Commercial bank? Cherish the loan? Seriously hindered the rational flow of funds, reduced the efficiency of the use of funds, and then slowed down economic development.

Because? Cherish the loan? The root of this problem is the lack of credit, and the solution to this problem should also start with credit.

By designing feasible credit derivatives, commercial banks can separate credit risks from market risks and transfer them at reasonable prices. Cherish the loan? The problem will be greatly alleviated. The key to trading credit derivatives in the market is to find a suitable buyer. In real economic life, if the price is reasonable, institutions that know more about borrowers than commercial banks are willing to buy credit derivatives.