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Seats are limited, so act fast. Let us journey together toward sustainability! [Click to register] Author: Zhang Haiyun, Director of the Financial Markets Research Center and Professor at the School of Finance, University of International Business and Economics; Zhang Yilin, Fixed Income Trader at Tianfeng (Shanghai) Securities Asset Management Co., Ltd. This article was originally published in the September 2026 issue of Bond.
Abstract: This article combines the phased development history of China's credit derivatives market to explore how the underlying debt clause, a product design detail, affects the product functions and market development of credit derivatives, and how improved product design can empower the transformation and upgrading of credit risk monitoring and management.
Keywords: credit derivatives, credit risk mitigation tools, credit protection tools, CDS, underlying debt. As a powerful tool for dynamically managing credit risk, credit derivatives can help banks and other financial institutions transfer, hedge, and diversify credit risk, and optimize the risk-return structure of investment portfolios. From a macro perspective, efficient market-based risk transfer helps resolve excessive concentration of risk in most cases, promotes market price discovery, prevents systemic risk, and enhances the elasticity and resilience of the financial system, which is of great value for building a financial powerhouse. Like other cutting-edge financial products, credit derivatives had already established their status as mainstream products in developed markets before being introduced to China, but the reality of the domestic market is very different from that of developed markets, so in the product design stage, China's financial market adopted a phased advancement strategy of "from simple to complex, from easy to difficult."
Credit default swaps (CDS) are an important financial derivative instrument, essentially an "insurance" against the default risk of bonds or loans. The "first-generation Chinese-style CDS" launched in 2010 adopted a "single underlying debt" clause, and its simple structure suited the domestic market conditions at the time, promoting the initial improvement of credit risk monitoring and management in China's financial industry. Its drawback was that the extremely simple structure significantly limited the product's risk monitoring and management functions and did not align with the general structure of the international CDS market. The "second-generation Chinese-style CDS" launched in 2016 introduced a "multiple underlying debt" clause, greatly expanding the product's risk monitoring and management functions. Further promoting the "second-generation Chinese-style CDS" will help the domestic credit market achieve refined transformation and upgrading in its new stage, help align with international markets, and advance RMB internationalization.
The Current State and Phased Advancement of CDS Localization
(1) Types of Domestic Credit Derivatives. From the perspective of trading venues, the domestic credit derivatives market is divided into the interbank market and the exchange market. From the perspective of the number of underlying entities, domestic credit derivatives are divided into two major categories: single-name products and index-type products. Single-name products are linked to a single underlying entity, including products such as single-name credit default swaps (Single-Name CDS). Index-type credit derivatives are similar to stock indices, being asset portfolios composed of single-name credit derivatives in specific proportions.
1. Interbank Market Single-Name Credit Derivatives. There are four types of single-name credit derivatives in the interbank market: first, credit risk mitigation warrants (CRMW); second, credit risk mitigation agreements (CRMA); third, CDS; and fourth, credit-linked notes (CLN). The first two products were launched in 2010 and are called "first-generation Chinese-style CDS"; the latter two were launched in 2016, among which CDS is also called "second-generation Chinese-style CDS."
2. Exchange Market Single-Name Credit Derivatives. There are two types of single-name credit derivatives in the exchange market: first, credit protection certificates (CP-Cert); second, credit protection agreements (CPC). These two products were piloted by the Shanghai and Shenzhen Stock Exchanges starting in 2018 and are collectively called credit protection tools.
3. Index-Type Credit Derivatives. Both the interbank market and the exchange market have created index-type credit derivatives. Among them, the National Association of Financial Market Institutional Investors launched three interbank CDS indices in 2021, and the exchanges piloted the launch of credit default swap index (CDX) portfolio-type credit protection agreements in 2022.
(2) Localization Approach of First-Generation Products. When the National Association of Financial Market Institutional Investors launched CRMW and CRMA in 2010, the domestic credit market was still in its early stage of development. Domestic participants were not yet familiar with the phenomena, concepts, and institutional systems of the international credit market, nor did they have personal experience with them. At that time, the domestic bond market had not yet broken implicit guarantees, and bond default events and their subsequent evolution were still blank in China. Although in the field of bank loan defaults and non-performing loan disposal, the banking industry and the special opportunity investment industry had accumulated a certain degree of professional knowledge and practical experience, such knowledge and experience had not yet entered the视野 of the broad bond market participants. In view of this, the National Association of Financial Market Institutional Investors adopted a "2+N" innovative product framework of "from simple to complex, from easy to difficult," first launching two simple products, CRMW and CRMA, as basic innovation pilots, while reserving space for other credit derivative innovations.
(3) Multi-Dimensional Expansion of Product Design. An important simplification of CRMW and CRMA was the adoption of the "single underlying debt" clause, which differs from the "multiple underlying debt" clause commonly used in the international CDS market. A common misunderstanding is to confuse the distinction between "single underlying debt" and "multiple underlying debt" with the distinction between "single-name" and "multi-name." We use a simple example to illustrate the difference. Suppose Enterprise A has four debts: Bond A, Bond B, Loan C, and Loan D. CRMW and CRMA adopting the "single underlying debt" clause can only select one of these four debts as the underlying debt. If the underlying debt is Bond A, the corresponding credit protection does not cover Bond B, Loan C, or Loan D. Unlike CRMW and CRMA, CDS adopting the "multiple underlying debt" clause can cover multiple or all of these four debts. At the same time, the CRMW, CRMA, and CDS in this example are all single-name credit derivatives, because their underlying entity is the single Enterprise A. It can be seen that "single-name" and "multi-name" distinguish the number of underlying entities, while "single underlying debt" and "multiple underlying debt" distinguish the number of underlying debts under the same underlying entity.
In the "2+N" innovative product framework adopted by the National Association of Financial Market Institutional Investors, 2 corresponds to the two extremely simple products CRMW and CRMA, and N corresponds to subsequent multi-dimensional expansion, including not only the two dimensions of the number of underlying debts and the number of underlying entities mentioned above, but also other dimensions such as cash flow structure and types of underlying debt. An example of expansion in the cash flow structure dimension is credit-linked notes (CLN), which by 2025 had reached a 15% market share among interbank credit derivatives; an example of expansion in the type of underlying debt dimension is CRMW linked to senior and mezzanine tranches of asset-backed securities (ABS), and such tools have already appeared in the domestic securitization market. Table 1 summarizes the position of each product in the interbank credit derivatives market within the "2+N" innovative product framework.
The simplicity of the "single underlying debt" clause created convenience for CRMW and CRMA as first-generation products. However, in the long run, this extreme simplicity also makes it difficult for them to carry the heavy responsibility of standardization, scaling, and systematization upgrading of the credit derivatives market. In view of this, the new generation of domestic credit derivatives, including the "second-generation Chinese-style CDS" and the credit protection tools launched by the exchanges in 2018, have all introduced the "multiple underlying debt" option.
Underlying Debt Clauses and Credit Risk Monitoring and Management
Credit derivatives provide convenient tools for banks and other financial institutions to actively manage credit risk. At the same time, once trading in the credit derivatives market reaches sufficient activity, market prices and other data of credit derivatives can provide an objective benchmark for credit risk monitoring. It is worth noting that the underlying debt clause has a profound impact on the potential activity of the credit derivatives market, the way prices are presented, the effectiveness of credit risk management, and the quality of credit risk monitoring. Compared with first-generation products adopting the "single underlying debt" clause, the new generation of domestic credit derivatives that introduce the "multiple underlying debt" option is better suited to the refined transformation and upgrading of credit risk management and monitoring.
(1) Six-Dimensional Evaluation System for Product Design. In product structure and market structure, some arrangements originate from spontaneous conventions of micro-level trading entities, while others originate from macro-level top-level design. If the focus is on improving the quality of credit risk management and monitoring, the corresponding design perspective needs to identify product features and market features beneficial to this quality goal. Generally speaking, the higher the market activity, the lower the transaction cost and the more reliable the price, which is conducive to both the risk management of market participants and the risk monitoring of regulators and market participants. It can be seen that market activity is a one-way favorable factor, and a potential focus of product structure and market structure design is to enhance market activity. Low transaction costs and reliable price information usually also enhance market activity, so these three features are mutually causal. Clearly sorting out the three features helps analyze problems starting from the most essential factors. Due to space limitations, this article directly cites the six-dimensional evaluation system proposed by Zhang Haiyun et al. (2010) to compare the advantages and disadvantages of the two structural designs of "single underlying debt" and "multiple underlying debt." The six evaluation dimensions are scale effect, standardization, price discovery, hedging efficiency, trading willingness, and regulatory efficiency.
From the perspective of scale effect, the "multiple underlying debt" clause enhances the homogeneity of CDS for the same entity, thereby gathering scale and liquidity, while credit risk mitigation (CRM) products for the same entity are fragmented due to the "single underlying debt" clause. From the perspective of standardization, the "multiple underlying debt" clause allows CDS for the same entity to form a series of standard maturities from 1 year to 10 years and roll on schedule; this product-level standardized maturity structure is not affected by the aging of specific debt items, while the maturity of CRM products adopting the "single underlying debt" clause is affected by the aging of their underlying debt and cannot achieve maturity standardization. From the perspective of price discovery, the "multiple underlying debt" clause brings advantages to the CDS market in terms of scale, liquidity, standardization, and comparability, thereby promoting price discovery, while CRM products adopting the "single underlying debt" clause reduce liquidity due to fragmentation, thereby inhibiting price discovery. From the perspective of hedging efficiency, we can distinguish two scenarios: hedging the spot exposure of the underlying debt and hedging the exposure of credit derivatives. In the scenario of hedging the spot exposure of the underlying debt, the "single underlying debt" clause gives CRM products higher hedging precision; when hedging the exposure of credit derivatives, CDS adopting the "multiple underlying debt" clause can achieve higher precision and lower hedging costs through standardization. From the perspective of trading willingness, under the "multiple underlying debt" clause, CDS is more private because it does not need to disclose the specific underlying debt, which is very attractive to institutions wishing to hedge spot exposure, and its superior liquidity and comparability also bring convenience to market makers and investors. From the perspective of regulatory efficiency, we can distinguish two aspects: the trading intention of a single transaction and the price information at the market level. From the perspective of the trading intention of a single transaction, CRM products adopting the "single underlying debt" clause provide higher transparency; from the perspective of market-level price information, the "single underlying debt" clause leads to fragmentation of CRM product price data, while the "multiple underlying debt" clause brings CDS products a directly observable standardized maturity structure, providing a more transparent indicator for market monitoring.
(2) Product Design and Market Liquidity. Good market liquidity promotes all six aforementioned evaluation dimensions, and some correlations are mutually causal. For the credit derivatives market, some specific investment and trading strategies also affect liquidity, and the underlying debt clause affects the implementation of these strategies, thereby affecting liquidity. For example, for the supporting investment strategy of "credit bond spot + credit protection," its entry and exit are accompanied by demand to buy and sell credit protection. Consider the following scenario: Investor A needs to adopt this supporting investment strategy, and Investor B needs to exit, but the credit bond spot of both is different bonds of the same entity. Then, CDS adopting the "multiple underlying debt" clause can potentially match the two parties' demand to buy and sell credit protection, while CRM products adopting the "single underlying debt" clause cannot. In this scenario, the "multiple underlying debt" clause can better enhance market liquidity. Zhang Haiyun (2016) specifically analyzed two other mechanisms by which the "multiple underlying debt" clause enhances market liquidity: first, connecting markets and increasing scale; second, avoiding market-making risk and reducing transaction costs.
(3) Product Design and Loan Hedging. Helping the banking industry hedge the huge credit risk exposure of loans was one of the important motivations for launching domestic credit derivatives in 2010, and the underlying debt clause adopted by credit derivatives also profoundly affects the effectiveness of their loan risk mitigation function. The complexity in this field involves the behavioral preferences of banks and credit protection providers, the substantive effectiveness of risk hedging, and the regulatory standards for capital mitigation. From the perspective of behavioral preferences, given privacy or transfer restrictions, banks are unwilling or unable to use loans they have issued as the underlying debt, while investors providing credit protection are more willing to use bonds that are actively traded and widely known in the public market as the underlying debt. This means that for arrangements using bank loans as the underlying debt, both buyers and sellers of credit protection lack motivation. This judgment is consistent with actual market conditions; among the underlying debts of CRMW and CRMA, there are relatively few publicly verifiable cases using bank loans as the underlying debt. Then, can CRMW and CRMA using bonds as the underlying debt effectively hedge loans of the same entity held by banks? The conclusion is that they can only achieve partial hedging and cannot be regarded as complete hedging. Although the underlying bond and the hedged loan belong to the same debtor, they are still different debt items: a default on the loan does not necessarily lead to a credit event on the underlying bond. Therefore, even if the loan held by the bank defaults, CRMW and CRMA may not trigger compensation, and the protection buyer may still bear uncovered losses. In other words, such arrangements can only mitigate part of the borrower's credit risk and cannot fully cover the default risk of the loan debt item itself. Because there is a gap in risk mitigation, regulatory capital occupation is usually difficult to reduce accordingly.
Advancement and Evaluation of Product Functions
(1) Overall Market Development Is Accelerating. In 2010, Shi Wenchao, then Executive Vice Chairman and Secretary-General of the National Association of Financial Market Institutional Investors, mentioned three points when discussing the necessity and urgency of launching the domestic credit derivatives market: first, "the need for market entities to effectively hedge credit risk," referring to the demand of credit bond investors to hedge credit risk; second, "the need for market institutions to achieve sustainable development," referring to the demand of banks to hedge the credit risk of loans; third, "the need to promote the stable development of macro finance," referring to the demand of financial institutions and various financial sub-sectors to reasonably allocate and diversify credit risk.
Compared with exchange credit derivatives, the interbank market credit derivatives have more complete historical data disclosure. Therefore, the following mainly discusses overall market development based on interbank market credit derivatives data.
1. Rapid Total Growth and Huge Room for Development. Since 2018, the growth rate of the interbank credit derivatives market has been significantly faster than the growth rate of domestic loans and credit bond stock (see Figure 1). As of the end of 2018, the outstanding transaction amount of interbank credit derivatives was 8.2 billion yuan, accounting for 0.6 per ten thousand of loan stock and 3.4 per ten thousand of credit bond stock. As of the end of 2024, this amount had grown to 95.7 billion yuan, accounting for 3.7 per ten thousand of loan stock and 21.8 per ten thousand of credit bond stock. From the rapidly increasing proportion, the function of interbank credit derivatives in hedging spot assets is accelerating its release. At the same time, from the order of magnitude of the proportion, there is still huge room for growth in the future.
2. Risk Allocation and Diversification Functions Are Emerging. According to the "2024 Credit Risk Mitigation Tool Market Operation Report" released by the National Association of Financial Market Institutional Investors, the net buyers of CRM transactions were more concentrated in asset management products and foreign banks, and foreign banks became the largest net buyers; the types of net sellers of CRM transactions were relatively dispersed, with the net selling volume of joint-stock banks, city commercial banks, and large state-owned banks declining significantly. Securities companies replaced joint-stock banks as the largest net sellers, and rural commercial banks shifted from net buyers to net sellers (see Figure 2). It can be seen that interbank credit derivatives support the reasonable allocation and diversification of credit risk among financial institutions and financial sub-sectors.
(2) First-Generation Products Still Dominate. Although since 2016 the domestic market has launched credit derivatives including the "multiple underlying debt" option, and their transaction amount and market share have gradually increased, reflecting growing market demand for this option, they have so far not reached a dominant position. According to the "2025 Credit Risk Mitigation Tool Market Operation Report" released by the National Association of Financial Market Institutional Investors, in 2025 the ranking of interbank credit derivatives by transaction proportion of each variety was: CRMA (50%), CRMW (22%), CLN (15%), CDS (13%). The interbank market credit derivatives market traded a total of 427 transactions for the year, with a notional principal of 58.3 billion yuan. Among them, CRMW and CRMA both adopt the "single underlying debt" clause, and their combined market share is 72%, occupying an absolutely dominant position in the interbank market. There is no publicly available statistical data on the specific annual transaction amount of exchange market credit protection tools in 2025, but based on historical conditions, it should be lower than CRMW and CRMA. Related research shows that with the marginal improvement of credit risk in 2024-2025, the scale of credit protection tools in both markets fell sharply. From a cumulative historical perspective, the total transaction amount of exchange market credit protection tools is also significantly lower than that of CRMW and CRMA. The above data indicate that in the current domestic market, products adopting the "single underlying debt" clause still occupy a dominant position.
(3) Loan Hedging Function Remains to Be Developed. Helping banks hedge the credit risk of loans is one of the three major target functions of domestic credit derivatives, but the first-generation CRMW and CRMA are not suited to this function in principle, and this mismatch has also been confirmed by actual conditions. From the launch of the "second-generation Chinese-style CDS" in 2016 to 2025, the share of CDS allowing the "multiple underlying debt" clause in the interbank market grew from 0 to 13%, a clear increase, but the specific usage of domestic CDS remains to be further explored. From Figure 2, in 2024 all sectors of the domestic banking industry were net sellers of credit protection, from which it can be judged that the domestic banking industry most likely has not used CDS on a large scale for loan risk hedging and capital mitigation. Foreign banks were the largest net buyers of credit protection in 2024, and there is no publicly available information on the specific product types and methods they used.
(4) Product Design Evaluation System Needs Improvement. By sorting out the impact of product design on market liquidity and loan hedging functions, we have the following thoughts on improving the six-dimensional evaluation system. First, since the existing "hedging efficiency" dimension does not yet cover the effectiveness of loan hedging, the "hedging efficiency" dimension should be expanded into "hedging quality," covering sub-dimensions such as hedging effectiveness, hedging precision, hedging convenience, and hedging cost. Second, the cost of banks using derivatives is closely related to the accounting treatment of hedging and capital regulatory rules, and capital regulatory rules have a decisive impact on the capital mitigation function of credit derivatives. Financial regulatory rules are an important dimension that must be considered in the product design evaluation system. Finally, the supporting investment strategy of "credit bond spot + credit protection" inspires us to pay attention to the specific impact of trading strategies on usage scenarios.
Conclusion
This article discusses the many advantages of the "multiple underlying debt" clause and the many limitations of the "single underlying debt" clause in the field of credit risk monitoring and management, and also discusses the compatibility of the extremely simple product structure adopted when the first-generation products were launched in China in 2010 with the national conditions at that time. At present, China's credit market has made leapfrog progress in scale, product types, degree of management refinement, and accumulation of default and disposal experience. At the same time, the credit derivatives market has already made relatively sufficient preparations at the institutional level for refined management. Promoting products adopting the "multiple underlying debt" clause is both consistent with the current domestic credit market environment and conducive to promoting further refinement of credit risk monitoring and management and to aligning the domestic market with international markets, and relevant research should be considered for advancement as appropriate.
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