Citi & CIMB Bank Close Malaysia’s First Interbank Ringgit Credit Default Swap

Kuala Lumpur – Citibank Malaysia and CIMB Bank have entered into the first interbank Ringgit credit default swap (CDS), marking a true landmark for the development of the Malaysian domestic capital market. This represents a significant step in further developing the domestic capital markets by enlarging the scope of hedging instruments available to now include hedging credit risks. This is also in line with the objective of the Malaysian government in enhancing the efficiency and dynamism of the domestic financial system.

The underlying reference entity, Projek Lebuhraya Utara Selatan Berhad, was chosen for its large outstanding cash market issuance. A credit default swap involves one party paying a fixed coupon rate over the life of the transaction in exchange for a payment to be received in the event of a default.

Sanjeev Nanavati, Country Head of Citi Markets and Banking remarked, “Credit derivatives are the fastest growing segment of the derivatives market. According to ISDA market surveys, from just under US$1.0 trillion at end-2001, the total notional amount of credit default swaps has grown to US$26.0 trillion as at mid-2006. While predominantly concentrated in the offshore USD market, the next phase of growth will extend to onshore local currency markets of which Malaysia is one of the first in the region.

Lee Kok Kwan, Group Treasurer of CIMB Group said, “The development of the Ringgit credit derivative market is critical as it will enhance the efficiency of the Malaysian corporate bond and loan markets and will significantly strengthen the robustness of the country’s financial system from credit risks. As it is, the Ringgit derivative, government and corporate bond markets are now a proven success where it is recognized as one of the most successful domestic currency debt markets globally and the onset of the Ringgit CDS market represents the next significant phase in its development.”