Chinese counterparties challenge collateral
March 11, 2010 | BY
clpstaff &clp articles &Chinese banks and corporates are challenging collateral requirements demanded by foreign counterparties. Foreign banks need to reconsider their approach…
Chinese banks and corporates are challenging collateral requirements demanded by foreign counterparties. Foreign banks need to reconsider their approach if they want to develop their China desk.
The financial crisis encouraged counterparties to question the collateral they typically posted as, when a counterparty such as Lehman defaulted, companies that held a derivatives contract with that party found that they became unsecured creditors.
Speaking at a recent IFLR briefing on derivatives, panellists agreed that their institutions may have to reconsider their attitudes to collateral on derivatives transactions.
“Chinese counterparties are saying: 'Who are you to come to China and tell me to post collateral?' The question is how we deal with this,” said Li-Lian Khoo of UBS.
“Are there alternative forms of security that we can accept such as a special account, cash as collateral or bonds as collateral? Are we prepared to post? What happens if they challenge the bank's valuations? These are necessary conversations that we should have with our trading desks.”
Counterparties have also pushed back against collateral calls based on mark-to-market valuations.
Chin-Chong Liew of Linklaters, however, sees this as a natural part of the Chinese derivative industry's development. “Chinese banks and corporates are very concerned about risk now. Before, when they signed, they asked very few questions. Now they look at the contract in a big way.”
“Last year was a real growth period for China – not just quantitative but qualitative. At times, it may seem like it's three steps forward, two steps back, but it's still growth.”
Click here for more on the IFLR briefing. This story appears courtesy of IFLR.com
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