Portfolio managers at commercial banks are holding back from entering legitimate trades because of concerns that market participants might think they are allowing information to flow through the Chinese wall. David Bushnell, senior risk officer at Citigroup, noted that in spite of procedures ensuring portfolio managers do not have access to private information, trading is impeded in many cases because of sensitivity over the issue. David Hinman, executive v.p. at PIMCO, said it believed banks were trading on supposedly confidential information in 2002 and is not convinced this has stopped.
Another challenge facing portfolio managers is how to hedge less liquid exposures and develop hedges that are effective under the new accounting rules. Bushnell said Citigroup has traditionally mitigated credit exposure by selling loans or entering credit derivatives on individual names or portfolios, but is looking at other strategies because recent acquisitions mean its USD500 million portfolio has more middle market exposure, a sector which is not liquid in the single-name credit-default swap market. Accounting changes have also meant it is looking at different hedging strategies, noted Bushnell.