A long time ago (fictional), Mr Patel and friends brought some exotic fruits from the north to Singaporeans. Citing health benefits and fresh ingenuity, they encouraged interest from the masses and, slowly, created a sizable market for the fruits. Seeing the developing interest and the huge market appetite, Mr Goh set up a hyper-supermarket for the suppliers and buyers, cutting away the middle-man. This ensures that buyers/sellers alike are able to buy and settle directly at the super-market. Turns out Mr Patel and friends were not too happy about it and refused to endorse the supermarket. Their continued non-appearance at the market caused a lot of concerns. IS there something wrong with the supermarket?
Some think so, at least for the first listed credit derivatives exchange market.
What's a credit derivative? A credit derivative is a contract (derivative) to transfer the risk of the total return on a credit asset falling below an agreed level, without transfer of the underlying asset e.g. if I were to buy a bond issued by Mama Megacorp and am afraid of the bond defaulting, I can buy "protection" by entering into a credit derivatives swap with a bank to pay them a certain fee every period (eg quarterly). In return, should the bond issuer defaults, the bank will have to buy the bond from me (at par) regardless of whatever the trading price of the bond is now. Hedge funds also use it to gain synthetic exposure to certain names at a cheaper cost of funding.
I guess the banks are probably not keen on sharing the billion-dollar pie with someone else and hence not interested in supporting this initiative. Buy-in is especially important for such an exchange as the purpose of having such an exchange is to improve liquidity, eliminate mis-pricing and generate interest.
As my mama says, the first step is always the hardest.
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