The document provides an overview of the evolution and growth of the global credit default swap (CDS) market from 1994 to 2012. It discusses key milestones and developments over this period, including the first CDS trade in 1994, increased standardization of documentation and contracts through industry initiatives in the late 1990s/early 2000s, the rapid growth and expansion of the market in the 2000s, and central clearing and regulatory changes following the 2008 financial crisis. The document also examines ongoing challenges for CDS markets in Asia, including lack of historical default data, liquidity issues, and the need for further standardization and legal/settlement frameworks.

1. Credit Default Swaps – India
FIMMDA – PDAI 13th Annual Conference 2012
DATE: 27th January 2012
Ben Davies
Head of Credit Trading, DBS Singapore

2. Private & Confidential
2
1994 : The First Ticket
Ms Blythe Masters of JP Morgan closes what’s widely acknowledged as the first CDS
trade by buying protection from the EBRD on the corporation Exxon after the Exxon
Valdez oil disaster spiked failure concerns on the worlds second largest oil company.
1995 - 1999: The Wild West
All major Wall Street and London dealing houses create their first CDS desks.
•Documentation, bespoke & a mess
•Liquidity, none to a little more
•Intent, a rapid change in customer focus
•ISDA 99, the first true milestone
2000 - 2003: Over Taking Bonds
Single name CDS now quoted across the capital structure and Rating spectrum.
Volumes spike to eclipse the products that CDS was created to hedge. The death of
Enron & the Dot Com collapse test the fledgling settlement process’s.
•IBOXX & TRAC X – The birth of the indices
•Documentation back logs, errors & fears… A scary paper trail
•Mark-It Partners & DTCC. Transparency surges volumes once again.
•ISDA 2003 sets the standard for standardization.
The Evolution Of A Product

3. Private & Confidential
3
2004 - 2007: The Ugly Years
As CDO’s mutated from Cash to Synthetic the market first ran then sprinted before its time. Many
good lessons however were learned from the mistakes.
•Tranches, CDO Squares, SPV’s, The great correlation unwind….
•Delphi & Dana personify physical settlement “Price Squeezes” & the market takes notice.
•Market moves to IMM settlement.
2008 - 2011: Hank Paulson Understands ISDA 2003
CDS in the Great Credit Crisis... Suddenly EVERYONE is in the same boat.
•The importance of the word “Conservatorship”… The effect on CDS enters the decision line.
•Big Bang, Little Bang & Standardised coupon initiatives.
•Central clearing evolves… Dodd-Frank enforces.
•Explosion in volumes of global index.
2012 & Beyond :
The market nears what its always set out to need….
•Standardised & trusted documentation representing a solid and defined legal structure.
•True Assimilation in structure & central clearing as the norm.
•A balance of market participants to truly reflect true value and avoid skewed pricing
The Evolution Of A Product

4. Credit Default Swaps – India
FIMMDA – PDAI 13th Annual Conference 2012
DATE: 27th January 2012
Gigi P. Tan
Global Content Specialist – Credit

5. 5
Nov’10: The Chinese
market opens for
Credit Mitigation
Instruments with
CRMA and CRMW.
Dec’11: Indian market
sees first INR-
denominated CDS
trades (Rural
Electrification Corp
and India Railway
Finance Corp)
2009: More
standardisatio
n mainly in
valuation with
the Big Bang
(Apr) and
Small Bang
(Jul) Protocols.
1997 1999 2001 2003 2005 2007 2009 2011
1995
1995/1996:
The concept of
a Credit
protection
instrument is
created by JP
Morgan and
Single Name
CDS starts to
trade
1999/2000: The
market opens to
more parties. We
see some first
real volume from
IDBs
Mar 2003: ISDA
definitions
become the
market standard.
Oct 2003: IBOXX
and TRAC-X CDS
Indexes are
created.
Later in 2004
they were
merged to form
iTraxx for Asia
and Europe, and
the DJ CDX for
North America.
Jun 2005: ISDA
creates
definitions for
CDS on ABS
1998: first basket
trades

6. 6
Evolution of CDS: Global Growth (2001~2012)
-
10,000.00
20,000.00
30,000.00
40,000.00
50,000.00
60,000.00
70,000.00
1H01 2H01 1H02 2H02 1H03 2H03 1H04 2H04 1H05 2H05 1H06 2H06 1H07 2H07 1H08 2H08 1H09 2H09 1H10 2H10 1H11 2H11 1H12
Credit Default Swaps Outstanding in billion $
Source: ISDA Market Survey (2001~10), DTCC (2010~12)

7. 7
Challenges in the Asian Market
Negative Mindset on CDS
Pricing
- Lack of Default Statistics/ Empirical Data
Market Liquidity
- Reference vs. Deliverable Obligations
- Standardisation of Contracts
Settlement issues
- Proper legal framework
- Central clearing
- Determination Committee

8. 8
Challenges in the Asian Market
• A Negative Mindset
– CDS at market inception = Hedging Tool
– implies exposure to highly risky credits
– As market evolves CDS becomes THE primary tool to take a
position on a Credit
– a very active market in CDSs written on credits in which neither
the buyer nor the seller of protection believes there is the
remotest possibility of default
• China: Credit Risk Mitigation Instruments
– Hesitation to use the term “Default”
– Hesitation to expose volume information (NAFMII)

9. 9
Challenges in the Asian Market : Pricing
• Lack of Empirical Data/Default Observations
• Asia (ex-Japan)*
*Asia refers to Cambodia,
China, Fiji, Hong Kong, India,
Indonesia, Korea,
Malaysia,Marshall Islands,
Mongolia, Pakistan, Papua
New Guinea, Philippines,
Singapore, South Korea, Sri
Lanka, Taiwan, Thailand, and
Vietnam
• 48 defaults in 17
years
• Japan: 3 CDS
defaults since 2003

10. 10
Challenges in the Asian Market : Pricing
• Lack of Empirical Data/Default Observations
• India
• Fitch India
National
Ratings 2010
Transition and
Default Study
• 18 defaults in 11
years

11. 11
Challenges in the Asian Market : Liquidity
Opaque Market
• Banks Price approximately 2,500 Single Names
• The liquid part of the Market is no more than 1,000.
• Many do not price daily, most do not have pricing in the full term
structure.
• 5Y Contracts are by far the most liquid.
Reference vs. Deliverable Obligations (CRMs)
• CRMs specify a deliverable obligation
• No naked positions
• Standardisation of Contracts

12. 12
Other Challenges: Settlement issues
Proper legal framework
• Weak bankruptcy laws in Asia
• E.g. Takefuji
Central Clearing
• transparency of CDS volumes trading
• DTCC has 98%* visibility
Determination Committee
*source: ISDA media comment Nov 2011

13. Credit Default Swaps – India
FIMMDA – PDAI 13th Annual Conference 2012
DATE: 27th January 2012
H. Jayesh
Founder Partner, Juris Corp

14. Eligible Participants
 Market Makers
• Commercial Banks
• Primary Dealers
• NBFCs#
• Mutual Funds*
• Insurance Companies*
 Users
• Market Makers
• Housing Finance Companies
• Provident Funds
• Listed Companies
• FIIs
* Subject to permission from their respective regulators
# Currently only as Users

15. User Restrictions / Obligations
 Only Indian Resident or Registered FIIs
 Only hedging / buy protection
 No naked CDS
• Hold Reference Obligation or Unwind
• CDS protection value ≯ FV of Reference Obligation
• CDS tenor ≯ Reference Obligation maturity
 Submit auditor / custodian certificate of holding underlying bond when
entering into / unwinding the CDS contract

16. User Restrictions / Obligations …contd
 On selling the Reference Obligation:
• Assign CDS with the Reference Obligation or
• Negotiate termination
 Hardwired termination:
• Uncovered CDS Event occurs within 10 Business Days
• CDS terminated and Buyer pays the Seller CDS Transaction Costs (one
way payment only)
 Failure / Non compliance - Not an Event of Default or Termination
Event
 Cannot enter into an offsetting trade

17. Reference Obligation
 Must satisfy ALL of the following at ALL times:
• Bond denominated in INR
• Direct obligation of the Reference Entity (no guarantees)
• Dematerialised format
• Freely transferrable without any contractual, statutory or
regulatory restriction (including SEBI lock-in requirements)

18. Reference Obligation …contd
 Any ONE of the following:
• Listed
• Rated by any Rating Agency
• Obligation in respect of which the Reference Entity is an SPV
that is an Affiliate of an Infrastructure Company

19. Reference Obligation …contd
 Must NOT be:
• Short Term Instrument (commercial paper)
• Asset-Backed Security
• Convertible Obligation
• Exchangeable Obligation
• Interest Receivable
• Puttable or Callable
 Consequences of failing Reference Obligation criteria on Trade Date
(or date of identifying Substitute Reference Obligation) - Terminate at
zero cost (no MTM, no Event of Default or Termination Event)

20. Deliverable Obligations
 User MCA
• Reference Obligation Only (consistent with User obligation to hold the
Reference Obligation)
 Market-maker MCA:
• Reference Obligation
• Deliverable Obligation Category: Bond
• Deliverable Obligation Characteristics: Not Subordinated, Not Sovereign
Lender, Not Contingent, Transferable, Maximum Maturity (30 years) and
Not Bearer
• Denominated in INR and dematerialised format
• Other than:
• Short Term Instruments (commercial paper)
• Asset-Backed Securities
• Convertible Obligations
• Exchangeable Obligations
• Interest Receivables
• Puttable or Callable obligations

21. Obligations
 Reference Obligation
 Obligation Category: Bond or Loan
 Obligation Characteristics:
• Not Subordinated and Not Sovereign Lender
 Excluded Obligations
• Short Term Instruments (commercial paper)
• Interest Receivables
 No guarantees
 No currency limitations

22. Credit Events
 Restructuring (Article 4.7) – substituted clause:
• BIFR decision
• Reference Entity is declared a Relief Undertaking or is granted
statutory protection from its creditors or from enforcement of any
monetary claims
• Reference Entity is referred to Corporate Debt Restructuring

23. Credit Default Swaps – India
FIMMDA – PDAI 13th Annual Conference 2012
DATE: 27th January 2012
Jacqueline ML Low
Senior Counsel, Asia - ISDA

24.  Determinations of Indian DC are legally binding on anyone who uses the
Market-maker MCA or User MCA.
 Representation on DC.
• 7 Market-maker FIMMDA members:
 2 Public Sector Banks.
 2 Private Indian Banks.
 2 Foreign Banks.
 1 Non-Banking Financial Company.
• 4 User members.
 Transparency.
 International experience.
Indian Determinations Committee
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25.  Between Indian and offshore CDS.
 Between Market-maker and User CDS.
• Ref Ob CDS for User.
• Physical Settlement Period.
• Uncovered CDS Event.
• Substitution Trigger Event c/f Substitution Characterisation Event.
Basis Risk
25

26. Credit Default Swaps – India
FIMMDA – PDAI 13th Annual Conference 2012
DATE: 27th January 2012
Mr. Vaidya Nathan
Director, Quantum Phinance

27. Credit Default Swap
Buyer of protection need not
suffer an actual loss to receive
compensation
A privately negotiated, off balance sheet
agreement that explicitly transfers credit
risk from one party to another
Credit
Default
Swaps
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Buyer of CDS protection need not
own the defaulted asset in order to
receive compensation

28. Credit Default Swaps market completion
Risk Free Rate
Funding Risk
Credit Risk
Funding Risk
Credit Risk
Credit Risk
Bond / Loan Asset Swap Credit Default
Swap
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29. CDS in the context of financial markets growth
New applications
expanding financial
instruments use
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30. Role of CDS
Uses of Credit Default Swaps
Hedge,
transfer and/or
mitigate credit
exposure
Decompose
and separate
credit risks
embedded in
financial
instruments
Proactively
manage credit
risk on a
portfolio basis
Manage
regulatory
capital ratios
Generate
leverage or
yield
enhancement
Synthetically
create loan-
bond;
alternative to
equity
derivatives
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Uses of Credit Default Swaps

31. • Broad definition
– bilateral financial contract which allows specific aspects of credit risk to be
isolated from the other risks of an instrument, and passed from one
counterparty to another
Off-balance sheet
On-balance sheet
CDS isolate and transfer credit risk
FX,
Interest
Rate
Credit
6.60 %
yield
60 bps
Loan/bond
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32. Efficiency gains arising from disaggregating risk
through CDS
JOB LOT
Auctioneer sells a number of risks,
each to the highest bidder
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33. Applications for CDS in the global market
Motivations for using Credit Default Swaps
1. Trading/ market making
2. Product structuring
3. Hedging trading
instruments
4. Active portfolio/ asset
management
5. Management of
economic capital
6. Management of
regulatory capital
7. Management of
individual credit lines
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34. Market Composition
Breakdown of market participation
42%
34%
24%
Intermediary / Market Maker Buyer Seller
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35. Credit Derivatives by region
Credit Derivatives by region
43%
5%
10%
39%
3%
London Europe ex-London Asia/Australia US Other
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36. Product Percentage
Single-name credit default swaps 29.3%
Credit spread options 2.1%
Swaptions 1.0%
Variance Swaps 0.1%
Credit-linked notes (cash-backed & repackaged notes) 3.3%
Synthetic CDOs (over 10 names) – full capital structure 2.9%
Synthetic CDOs (over 10 names) – partial capital/single tranche 12.9%
Basket products (up to 10 names) 1.1%
Full index trades 29.4%
Tranched index trades 9.9%
Equity linked credit products (e.g. equity default swaps) 0.9%
Credit Contingent Swaps 0.7%
Constant Maturity Swaps 0.9%
CPPI 2.0%
Credit Option / Bond Option 1.6%
Binary CDS 2.2%
Other 0.3%
Global Credit Derivatives Product Usage
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37. Global Credit Derivatives Product Usage
Global Credit Derivatives Product Usage
Single-name credit default swaps Credit spread options
Swaptions Variance Swaps
Credit linked notes (Cash backed and repackaged notes) Synthetic CDOs (over 10 names) – full capital
Synthetic CDOs (over 10 names) – partial capital/single tranche Basket products
Full index trades Tranched index trades
Equity linked credit products Credit Contingent Swaps
Constant Maturity Swaps CPPI
CDO^N Credit Option/Bond Option
Binary CDS Recovery CDS
Other
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38. 17%
22% 19%
10% 11%
66%
67%
65%
59%
52%
17%
11%
16%
30%
37%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2002 2004 2006 2008 2010
AAA-AA A-BBB BB or Below
Credit rating of the underlying reference entity
Credit rating of underlying reference entity in CDS
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39. Tenor distribution of CDS
Maturity
5 years
18%
5 – 10 years
21%
Over 10 years
2%
Under 1 year
7%
1 – 5 years
52%
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40. Market Constraints
Constraints in using Credit Default Swaps
1. Lack of client
knowledge of the product
2. Regulatory constraints
3. Systems / Infrastructure
4. Pricing – lack of data
5. Lack of agreed
accounting conventions
6. Lack of homogenous
documentation
7. Lack of market liquidity
and depth
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41. Credit Default Swaps – India
FIMMDA – PDAI 13th Annual Conference 2012
DATE: 27th January 2012
Mr. Gaurav Pradhan
MD & Head, Global Credit Trading,
Deutsche Bank, Mumbai

42. Journey so far...
42
2003 – 1st Draft Guidelines
Scope of allowing banks
and financial institutions to
use credit derivatives
2007– 2nd Draft Guidelines
To permit Banks and PDs
to deal in single-name
CDS. Kept in abeyance on
account of global financial
crisis
2010 – Internal Group report in
Introduction of CDS released in
July
Detailed policy framework with
discussion on international
practices
2011 – 3rd Draft Guidelines
in Feb and Final Guidelines
in May
Final guidelines published
to be effective from October
2011 – Capital adequacy
guidelines released in November
First trade printed in December
between ICICI and IDBI

43. Global Experience
43
RBI introduced CDS in the Indian market at the right time. It could draw upon the
experience of the western world during the Financial Crisis of 2008 and incorporate
important safeguards since the inception:
 Avoid complexity: Products like CDOs, ABS, MBS not allowed
 Curb Speculative activity: Users allowed to only hedge long positing in cash bonds
 Regulatory limits: Avoid excessive risk taking by putting limits like single name
exposure, gross PV01 limits
 Standardized contracts: Enable trade reporting; enable trde compression thereby
reducing systemic risks on account of large number of open contracts
 Regulatory oversight: Mandatory reporting of trades on central platform; Regulator
can monitor activity of participants and avoid any misuse/ large concentration of risk
 Central Clearing Counterparty: Important to avoid counterparty risk; Will be
introduced when volumes pick up and viable to implement

44. Role of FIMMDA – So far
44
FIMMDA played a key role in developing the market infrastructure:
 Documentation:
FIMMDA in liaison with ISDA and market participants helped in developing market
standard documentation (MCAs)
 Determinations Committee:
Scope and role of DC was defined; Initial list of DC members finalized
 Market-Makers
Market maker volunteers were identified
 Valuation Methodolgy
Methodology for daily valuation of CDS positions was developed. External vendor
was identified and mandated with the task of polling/ publishing curves

45. Role of FIMMDA – Future
45
Next steps required for market to develop:
 Activation of DC for continuous monitoring
 Standardized Margining policy
 Various supporting regulators like SEBI/ IRDA to evolve a framework allowing for
participants like Insurance companies/ Mutual Funds/ FII
 Central counterparty settlement
 Support training and development requirements for banks – Front office/ Middle
office/ Back office/ legal etc.

46. Market participants
46
Banks and PDs have been permitted by their Regulator to be market-makers (Onus
on them to ensure that the market develops)
Insurance cos/ MFs/ FIIs are yet to receive support from their respective regulators
Banks
PDs
Mutual Funds
Insurance Cos
NBFCs
FIIs
Corporates
Market Makers Users

47. Key Contributions
47
On behalf of FIMMDA, we would like to thank the market participants for their active involvement and
contribution in making the product go live:
 ICICI Bank
 IDBI Bank
 SBI
 Central Bank of India
 HSBC
 Standard Chartered
 Morgan Stanley
 Barclays
 Citi
 JP Morgan
 Bank of America
 ICICI Securities Primary Dealership
Additionally we would like to thank the following agencies
 Thomson Reuters, Markit, Bloomberg, Newswire18
 ISDA
 Juriscorp

48. Thank you!
Questions?
48