Notes

IMF Policy Discussion Paper- Credit Derivatives in Emerging Markets
Despite its rapid growth in the last five years, the credit derivatives emerging market is not yet a
fully mature market. In emerging christopher wilder deutsche bank , there is a large degree of complementarities and
interdependence between the bond market, the repo market and the credit derivatives market.
One can then expect that the core participants to credit derivatives markets will remain a subset
of the participants in the bond market. The recent validation of internal risk models of many
banks will boost the use of credit derivatives for prudential risk management.
Even if default swaps are now very standard products with a robust and simple legal
documentation, some legal uncertainties remain especially in the scenario of a debt
restructuring. Default swaps have though already demonstrated efficiency in a credit event
situation (Russia 1998, Ecuador, 1999, Argentina 2001), and the purchase of credit protection is
appealing for investors who want to control and optimize their credit exposure on a medium
term basis. However, default swaps premiums will probably stay relatively expensive to cover
hedging risks incurring by protection seller.
In an emerging economy under financial stress, the share and the nature of investors protected
or exposed via credit derivatives will have to be taken into consideration in the perspective of a
debt default or restructuring
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