Research On Design And Supervision Of CDS On The Basis Of Corporate Credit Bond Market In China

Abstract: CDS（Credit Default Swap） was a credit derivative emerged in1980sand is a credit risk management tool in itself with a basic function to guarantee thecredit right. With time elapsing, CDS has gradually becoming deviated from its basicfunctions and changed into a very popular speculative tool in Wall Street and lightedthe fuse of the world economic crisis in2008. Therefore, after the economic crisis,many people have become scared at the mere mention of the CDS and the market ofCDS has begun to shrink dramatically. By the end of2012, the market size of CDSwas only as half as being compared with its size at the peak time of2007.However, in terms of CDS itself as a risk management tool created by humans,as a matter of fact, it should not be judged ethically as good or bad and the key issueis how to use it properly. By tracing to its sources, started from the emergence of CDS,this article introduces its development history and explains that, as long as the CDSbeing brought back to its nature, it is a very useful risk management tool to play a roleas a stabilizer for the development of economy. On this basis and in combination withthe current status of the development of the bond market in China, this article proposeto establish a CDS market with China’s characteristics and its supervision system tomake the CDS from a seemingly unfathomable theory changing into a practical usefultool to promote the development of the bond market in China as well as to boost theconfidence of correct using of CDS.There are two innovations in this article:The first, the basic theory of the CDS is systematically and comprehensivelyintroduced. At present, there are many articles touching on CDS in China. However,almost all the articles are focusing on one side or another to introduce CDS; no oneintroduced it in a comprehensive way. The readers only can scrabble up some roughidea about the CDS. Instead, this article begins with the origin of CDS and introducesCDS from its definition, categories, operation system, transaction features and pricingthoughts to make readers comprehensively and accurately understanding the basictheory about CDS.The second is that proposed a feasible path for the development of CDS in China.Under the condition of market economy, every good only can survive in the market demand. China has currently developed CRM (Credit Risk Mitigation) product whichis similar to CDS in product structure. However, its progress has becoming boggeddown due to lacking of market demand. Starting from the current demand of corporatecredit bond market in China and according to the security character of the CDSproduct, this article proposed that CDS product should be developed by insurancecompany as main body thus not only is the market demand of CDS solved but can thetechnical issues of CDS also unfolded, which provide a possible way to CDS beingsettled down in China.