What is a Credit Risk Mitigation Certificate 15

It is a kind of CRM-credit risk mitigation tool, recently China's interbank trading market just issued a notice, defining two tools, one is the credit risk mitigation contract, which is no different from CDS, and the other is the so-called Chinese innovation is the credit risk mitigation certificate, compared with the contract, the certificate needs to be registered, can be traded like a bond, can be circulated! Both are used to hedge credit risk, and the most practical significance for banks is that they can reduce capital requirements and expand the scale of money lending!

Credit risk mitigation certificates refer to tradable certificates created by institutions other than the target entity to provide credit risk protection for the holder of the certificate on the underlying debt.

Credit risk refers to the possibility that one party to the transaction cannot fulfill the payment commitment and cause losses to the other party in the course of the transaction specified in the credit relationship. In the process of selling on credit, credit risk refers to the possibility that the buyer will not pay (repay) when due or will not be able to pay when due, resulting in arrears or unrecoverable payment. It can be said that the biggest and long-term asset of an enterprise is the customer, but the biggest risk of the enterprise also comes from the customer.

External causes of credit risk:

1.** disputes between the parties to the transaction;

2.Poor management of the trading partner's customers and inability to repay debts as they fall due;

3.The counterparty intends to occupy the company's funds;

4.Deliberate fraud by the counterparty.

Internal causes of credit risk.

1.The information of the transaction partner is incomplete and untrue;

2.Failure to accurately judge the credit status of the counterparty;

3.lack of understanding of changes in the credit profile of counterparties;

4.Lack of effective communication between the finance department and the sales department;

5.collusion between the internal personnel of the enterprise and the counterparty;

6.Failure to correctly select the settlement method and settlement conditions;

7.The approval of internal funds and projects is not strict;

8.lax control of accounts receivable;

9.lack of effective means of recovering arrears;

10.Enterprises lack a scientific credit management system.

Credit risk mitigation certificate destruction refers to a tradable negotiable certificate created by an institution other than the subject entity to provide credit risk protection for the certificate holder against the underlying debt. As a credit derivative product, credit risk mitigation certificate is not a separate transaction, but is attached to other financial transactions. Because credit risk mitigation certificates introduce third-party institutions in addition to debts, they are more standard and transferable than credit risk mitigation contracts.

The substance of the credit risk mitigation certificate.

From the perspective of definition and form, credit risk mitigation certificates are issued by the creator of the certificate to investors "one-to-many", which can be circulated and transferred in the secondary market, and are attached to the right of credit protection.

In essence, a credit risk mitigation certificate is a standardized credit risk mitigation contract, which can be bought and sold and transferred between different investors.

From the perspective of the market operation framework, the sale of credit risk mitigation certificates is similar to that of securities, and there are a series of processes such as creation and registration, issuance and sales, transaction settlement, and cancellation to standardize the management of credit risk mitigation certificates.

Answer]: A credit risk mitigation certificate is more different from the OTC financial derivatives contract, which is more similar to the issuance in the OTC market.

The implementation of "centralized registration, centralized custody, and centralized clearing" is conducive to enhancing the transparency of the market and preventing market risks.

Credit risk mitigation refers to the use of qualified collateral, netting, guarantee and credit derivatives by banks to transfer or reduce credit risk. When the internal rating method is used to measure credit risk regulatory capital, the credit risk mitigation function is reflected in the reduction of the probability of default (e.g., the substitution effect of guarantees), the default loss ratio, or the default risk exposure (e.g., netting).

The purposes for which the Basel Committee proposed credit risk mitigation techniques include:

1) Encourage banks to effectively offset credit risks through risk mitigation technologies and reduce regulatory capital requirements;

2) Encourage banks to accurately measure the risks faced by banks by developing more advanced risk measurement models.

Credit risk mitigation tools refer to credit risk mitigation contracts, credit risk mitigation certificates and other credit derivatives used to manage credit risk. A credit risk mitigation contract refers to a financial contract reached between the two parties to a transaction that stipulates that within a certain period of time in the future, the credit protection buyer will pay credit protection fees to the credit protection seller in accordance with the agreed standards and methods, and the credit protection seller will provide credit risk protection to the credit protection buyer for the agreed subject debt. Credit risk mitigation certificates refer to tradable and negotiable certificates created by institutions other than the target entity to provide credit risk protection for the holder of the certificate on the underlying debt.

The credit protection buyer and seller shall, in accordance with the contractual terms of the credit risk mitigation tool and in accordance with the principle of substance over form, determine whether the credit risk mitigation tool is a financial guarantee contract, and handle them in the following circumstances:

1) For credit risk mitigation tools belonging to financial guarantee contracts, in addition to the financing guarantee company in accordance with the provisions of Article 8 of the Interpretation No. 4 of the Accounting Standards for Business Enterprises, the buyer and seller of credit protection shall be accounted for in accordance with the provisions of the Financial Guarantee Contract in the Accounting Standards for Business Enterprises No. 22 Recognition and Measurement of Financial Instruments. Among them, the credit protection fees paid by the credit protection buyer and the credit protection income obtained by the credit protection seller shall be amortized on a reasonable basis during the period of the financial guarantee contract and included in the profit or loss of each period.

2) For other credit risk mitigation instruments that are not part of the financial guarantee contract, the credit protection buyer and seller shall classify them as derivatives for accounting treatment in accordance with the provisions of the Accounting Standards for Business Enterprises No. 22 Recognition and Measurement of Financial Instruments.

A financial guarantee contract refers to a contract that requires the issuer to pay a specific amount of compensation to the contract holder who has suffered the loss of the draft when the specific debtor is unable to repay in accordance with the terms of the original or modified debt instrument when it is due and cannot be repaid.

Buyers and sellers of credit protection who carry out business related to credit risk mitigation tools shall, according to the classification of credit risk mitigation tools, report in accordance with the Presentation of Financial Instruments in Accounting Standard for Business Enterprises No. 37, the Original Insurance Contract of Accounting Standard for Business Enterprises No. 25, or the Reinsurance Contract of Accounting Standard for Business Enterprises No. 26 and the Presentation of Financial Statements in Accounting Standard for Business Enterprises No. 30 respectively.

Credit risk mitigation refers to the use of qualified collateral, netting, guarantees and credit derivatives by commercial banks to transfer or reduce credit risk. Commercial banks use the internal rating method to measure credit risk regulatory capital, and the credit risk mitigation function is reflected in the decline of default probability, default loss rate or default risk exposure.

(1) Commercial banks should conduct effective legal review to ensure that the recognition and use of credit risk mitigation tools are based on clear and enforceable legal documents, and that the relevant legal documents are binding on all parties to the transaction.

2) Commercial banks should clearly stipulate the scope of credit risk mitigation coverage in the relevant agreements.

3) Commercial banks should not reconsider the role of credit risk mitigation. Credit risk mitigation can only be reflected once in a debtor rating, debt rating, or default exposure estimate.

4) Commercial banks should conservatively estimate the correlation between credit risk mitigation instruments and debtor risks, and comprehensively consider risk factors such as currency mismatch and maturity mismatch.

5) The capital requirement of a commercial bank after adopting credit risk mitigation shall not be higher than the capital requirement for the same risk exposure without credit risk mitigation.

6) Commercial banks should formulate clear internal management systems, review and operation procedures, and establish corresponding information systems to ensure that the role of credit risk mitigation tools is effectively played.

7) Commercial banks shall disclose the policies, procedures and degree of credit risk mitigation, the main types of collateral, valuation methods, the types of guarantors, the types of counterparties of credit derivatives and their creditworthiness, the risk concentration of credit risk mitigation instruments, and the risk exposure covered by credit risk mitigation instruments.

The "Pilot Business Guidelines for Credit Risk Mitigation Tools in the Interbank Market" released on October 29 created a credit derivative, namely a credit risk mitigation tool (CRM), which refers to credit risk mitigation contracts, credit risk mitigation certificates and other simple basic credit derivatives used to manage credit risk, that is, tradable, one-to-many, standardized, low-leverage credit risk mitigation contracts Agreement, CRMA) and CreditRisk Mitigation Warrant (CRMW) are considered by the industry to be an innovation of China's credit derivatives market in the world, similar to the CDS in the world.