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Credit Derivatives
On 6 September 2000, MAS released guidelines governing the capital treatment of credit derivatives after consultation with the industry. These guidelines address the capital treatment for three main credit derivative products: the credit default swap, the total rate of return swap and the credit-linked note. The guidelines reaffirm the principle of maintaining capital for risk exposure and allowing for relief where the risk has been suitably hedged.
The use of credit derivatives is expected to play a potentially important role in credit risk mitigation activities in Asia. Market participants have already seen significant increase in credit derivative usage as banks and corporates turn to these instruments to manage credit risk in the region. The proposals under the new Basel Capital Accord to grant capital relief for credit risk mitigation via the use of credit derivatives will lend further support to this developing market.
Asset Securitisation
Prudential guidelines governing the use of asset securitisation were issued on 6 September 2000, after taking into account industry feedback and existing securitisation
transactions. The guidelines define the roles, responsibilities and risks that banks retain or undertake when they participate in a securitisation transaction. They also set out the capital treatment of securitised assets, as well as disclosure, separation and other requirements for the various roles that banks take on in a securitisation transaction. The guidelines also seek to ensure that banks hold appropriate capital against the risks they undertake.
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