Credit concerns

One area worth a close watch in 2007 is undoubtedly the credit derivatives market. Over the past year, regulators have repeatedly sounded warnings about unsecured credit risk building up in the global financial system. The UK's Financial Services Authority has started investigating how large investment banks manage their collateral, fearing that they may not be ready for a sudden market downturn. It will be asking the banks about the quality of their systems for assessing collateral by checking they have sound collateral agreements, that collateral is correctly valued and appropriate haircuts are imposed and that the correlation between collateral and the value of the underlying exposure to the counterparty is reviewed, in both normal and stressed environments. The watchdog will also look at whether collateral can be realised - and recovered - quickly, if the underlying obligation to the counterparty is extinguished. The FSA is expected to report back in the first half of 2007.

Hence, we felt it was timely to include a credit special report in this issue, in which we discuss the issue of systemic risk, analyse the problem of data insufficiency for credit risk modelling and look at a new product launched by a few dealers - the muni bond - which has taken Asia by storm.

We also cast an eye over Japan, where authorities are set to tighten regulation of derivatives and collective investment schemes by requiring alternative investment marketers, such as hedge funds, to register with the Financial Supervisory Agency. While these firms are supposed to register as securities distributors already, there are many unlicensed alternative marketers and hedge funds soliciting investment in Tokyo. But will anything really change? Some feel the regulator will find it no easier now than it has before to enforce such rules.

Meanwhile, Japan has set the Basel II implementation date at the end of March 2007, and with the deadline just around the corner, many Japanese banks are struggling to meet pillar 2 requirements, as we discover.

And last but certainly not least, we present the results of the annual Asia Risk interdealer survey. It should come as no surprise that Deutsche Bank once again tops the poll, but the success of Standard Chartered Bank and Societe Generale in this year's poll has surprised some dealers.

We would also like to thank all our readers for your support this year. Merry Christmas and a happy new year!