The Hindu Business Line : ICICI Bank’s derivatives exposure at over $2.2 b

Chennai, March 4 ICICI Bank and its overseas subsidiaries have an exposure of over $2.2 billion in the credit derivatives market. Credit derivatives are defined as tradable financial instruments whose price and value derives from the creditworthiness of the obligations of a third party. Credit default swaps are an example of such derivatives.

Why would ICICI Bank get into this market?

Mr Vinod Kothari, an international expert on credit derivatives, explains that a bank such as ICICI Bank can, if it chooses, acquire exposures to other global entities in two ways. One, it could hold bonds of global banks.

Alternatively, it can get into the credit derivatives market by selling protection with reference to “XYZ Bank” or “ABC Bank” or any other entity. That is, it can offer to protect another entity say, a protection buyer, for a fee, against the possibility of a default by these institutions (XYZ or ABC). This fee or ‘credit spread’ is quoted in basis points (one basis point is one hundredth of a percentage point). Mr Kothari says this is an extremely liquid market with daily trades (annual volume estimated at $45 trillion) and as such credit derivatives are marked-to-market daily.

When default risks increase or any other specified event occurs, the credit spreads widen (i.e. protection fee tends to increase). Then, credit derivatives have to be accordingly marked down (just as investments portfolio gets marked down when interest rates go up). Till an actual default occurs, these losses may only be notional – but international accounting standards require you to provide for it. Credit default swaps are available for a period of 3, 5 and even 10 years, Mr Kothari says. The most popular is the five-year tenure. As the instrument progresses towards its maturity, the notional loss may actually come down if there is no default, he says.

More Stories on : Private Banks | Derivatives Markets | Credit Market | ICICI Bank Ltd

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