Don’t fear derivatives

Don’t fear derivatives
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First Published: Wed, Mar 05 2008. 12 12 AM IST
Updated: Wed, Mar 05 2008. 12 12 AM IST
ICICI Bank Ltd’s losses from its investments in credit derivatives show that global credit market turmoil has not left India untouched. Credit spreads have widened as investors flee from risky assets such as foreign bonds of Indian companies. That means the prices of these bonds and the derivatives they back have fallen. Investors such as ICICI Bank have to provide for these losses.
Too little is known about the nature of ICICI Bank’s exposure, especially whether it has invested in the safer or riskier slices of the CDOs it has bought. But, that’s an issue for the bank’s directors, risk managers and shareholders—unless the bets are large enough to upset the entire financial system. Else, there is no need to either lament or gloat.
Despite the losses, Indian regulators need to push ahead towards vibrant credit derivatives markets here. But these markets need smart regulation—externally by statutory regulators and internally by company boards.
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First Published: Wed, Mar 05 2008. 12 12 AM IST