Internal Control Mechanism Research On Credit Default Swaps Risks Of China’s Financial Institutions

With finance globalization, liberalization and innovation development, competition among banks increased and global finance turned into turmoil since the1990s. The financial institutions faced bigger and bigger risks. The demand of risk management increased intensely. Aiming at transfering the credit risk, credit derivatives arose at the historic moment and developed rapidly. It had an important role in the financial markets. With the rapid development of credit derivatives, it was more and more important in financial market. Credit default swaps (CDS) was the most widely used credit derivative and took up about two-thirds of the credit derivatives market share. CDS separated credit risk from the other risks and provided the risk transfer mechanism, which helped transfer and trade the credit risk. This changed the traditional mode of credit risk management fundamentally. Soon afterwards, CDS played an important function of risk diversification in the events of Enron bankruptcy and Worldcom bankruptcy. It won the general recognition of the market participants and regulators. Credit default swap market turned into a period of vigorous development in2002, in the name of the total, up from2.19trillion in2002to62.17trillion in2007.With the huge credit market scale, the credit risk management demand in our country is strong. In2013, financial institutions loans reached to71896.15billion RMB. Among them, the National Large Banks RMB loans was38214.40billion yuan. The Small and Medium-sized Banks RMB loans was19616.29billion yuan. The Four Big Banks RMB loans was28718.69billion yuan. At the same time, the bond market developed rapidly. The bond market in2013was8701.63billion with a year-to-year growth of9.05%. The rapid development of the credit market and bond market required inevitable credit risk management. In the absence of credit derivatives market, it is difficult to hedge, transfer and avoid credit risk effectively for commercial banks. With the risk accumulation, it will affect the healthy and stable development of market economy seriously. Therefore, it is imperative to develop our country’s credit default swap market.Credit default swaps have the characteristics of complex trading procedure and high risk connection chain. The default events will cause panic in financial markets. Therefore, it has important practical significance to establish and improve internal control system. The paper will study the CDS risk internal control of our country’s financial institutions. It proposes the background and significance of the topic, clarifies related theories, analyzes the current situation of the CDS market and elaborates the CDS basic and unique risks. According to its present situation and problems of internal control, we should draw lessons from America, the Europe and emerging countries. The paper argues that we should improve the risk control consciousness and internal corporate governance structure. We should also establish and improve financial institutions risk management system and internal audit supervision, strengthen risk internal control during the implementation of CDS. In addition, financial institutions should promote related supporting facilities, improve financial institutions supervision system, perfect the system of laws and regulations, set up credit rating system, improve the social credit environment and promote the stable development of the CDS market.In this paper, the main content is as follows:The first part puts forwards the background and significance, as well as summarizes the innovations and shortcomings of the paper.The second part analyzes related theories. It expounds the CDS risk internal control content framework and basic methods from the internal control and the theory of CDS respectively.The third part introduces present situation, problems and factors of our country’s CDS risk internal control. By analyzing the current situation of China’s CDS market, it explaines the objective environment, current situation, problems and specific factors.The fourth part introduces international reference and enlightenment of the topic. This paper introduces the practice and experience in international financial institutions and summarizes its enlightenment for our country’s financial institutions.The fifth part proposes CDS risk internal control suggestions. Aiming at the existing deficiency of the internal risk control and external supervision, it puts forward related suggestions so as to promote CDS risk internal control system.