| 1. Scope and Summary |
A CDS is a derivative contract which can transfer credit risk without directly transferring any credit asset. Reflecting the growing need to hedge credit risks in financial institutions, etc, the CDS market is expected to grow furthermore.
Currently, CDS's are transacted in the over-the-counter (OTC) market, and therefore it is desirable that a prevailed and transparent benchmark rate exists.
To answer to this current situation, Tokyo Financial Exchange (TFX) has decided to distribute CDS Reference Rates*1 with collaboration with many financial institutions. By doing so,
TFX hopes for market participants such as investors and financing firms to make wide use of these rates as a useful benchmark, and contribute to the development of the Japanese credit markets*2.
| *1 |
A CDS Reference Rate is the singular rate calculated from the best indicative rates in the OTC market provided by financial institutions. |
| *2 |
When TFX launches a new futures product related to CDS, CDS Reference Rates will be utilized for rates of the underlyings.
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| 2. Outline of CDS Referece Rates |
| a) |
TFX will publish the CDS Reference Rates calculated based on rates of CDS trades on specified reference entities (companies) every business day around 5:30PM.
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| b) |
CDS reference rates are the average of the offer-bid middle rates*1 offered at 3PM on the OTC market by the Designated Financial Institutions, excluding a specific number of both the highest and lowest rates*2.
| *1 |
TFX publishes CDS Reference Rates of the CDS contracts which are quoted by at least 5 Designated Financial Institutions.
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| *2 |
The CDS Reference Rate is the average of the indicative rates provided by the Designated Financial Institutions after excluding a specific number of both the highest and lowest rates respectively ('top and bottom cut'), rounded off to the second decimal place.
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| c) |
The indicative rates provided by the designated financial institutions are the rates (premium) of the following standardized CDS contracts:
| - |
5-year maturity |
| - |
Amount of 500 million yen for notional principle |
| - |
3 credit events*1 such as "bankruptcy", "failure to pay",and "restructuring (old restructuring)" |
| - |
A Physical Settlement*2 is required in case that any credit event occurs. |
| *1 |
The definitions of 3 credit events are based on the "the 2003 ISDA Credit Derivatives Definitions".
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| *2 |
The Physical Settlement is the way for delivering the credit asset in exchange for the specified amount of cash.
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| 3. Selection of Displayed Contracts |
Tokyo Financial Exchange (TFX) selects CDS contracts which the indicative rates have been provided by over 5 financial institutions as "Displayed Contracts".
| - |
In principle, when there are changes (addition or deletion) to the list of Displayed Contracts, the change will be notified 5 business days prior to the change. |
| - |
A Displayed Contract can be excluded from the list in the case where the referenced entity files for bankruptcy, commencement of proceedings for civil rehabilitation, special liquidation, corporate arrangement, corporate reorganization or in any other cases TFX considers it necessary.
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| 4. Flow of CDS Reference Rate Publication |
| (1) |
Financial Institutions provide indicative rates which they offered in OTC market at 3PM for CDS trades of individual referenced entities under the standardized conditions shown below:
| Item |
Standard for this system |
| Period (term) |
5 years
(maturity date is the first payment date counting 5 years
from the next business day of the indicative rate report date)
|
| Notional Principle Amount |
500 million yen |
| Credit Event |
The 3 events defined in the 2003 ISDA Credit Derivatives Definitions
(bankruptcy, failure to pay, and restructuring (old restructuring)).
|
| Referenced Credit |
Borrowed money |
| Delivery Method in case of Credit Event |
Physical Settlement |
| Interest (Premium) Payment Date |
20th of March, June, September, and December |
| Method of Adjusting Number of Days |
(number of days to payment date)/360 days |
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| (2) |
TFX calculates and publishes the CDS Reference Rates for Displayed Contracts on the J-CDS homepage around 5:30PM following the procedures below:
| a) |
The middle rate of the bid-offer rates provided by financial institutions is calculated (by simple average) for the displayed contract.
[middle rate calculation example] (unit: basis point)
| Bid |
Offer |
|
Middle rate |
| 20 |
25 |
 |
22.5=(20+25)/2 |
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| b) |
Of the middle rates calculated, a specific number of the highest and lowest rates will be excluded from the calculation ("top and bottom cut" - number cut off is determined by the number of financial institutions providing indicative rates for the referenced entity).
Number of
Financial Institution
|
Number excluded |
| 5 to 7 |
1 (total 2) |
| 8 to 14 |
2 (total 4) |
| 15 to 21 |
3 (total 6) |
| over 22 |
4 (total 8) |
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| c) |
The middle rate (simple average) of the rates left after "top and bottom cut" is calculated, rounded to the 2nd decimal place.
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| 5. List of Information Vendors |
The following Information Vendors provide CDS Refrerence Rates and market news about them.
| Vendor |
Ticker Code |
| Thomson Reuters |
0#CDSJAPAN=TIFF |
| QUICK |
TIFJ150 |
| Jiji Press |
XM12 to XM15 |
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6. Credit Default Swap (CDS) Reference Rate Publication System
|
Guidelines for Credit Default Swap (CDS) Reference Rate Publication System
(PDF)
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