HSBC plans to integrate its credit-default swap desk into its newly merged bond and loan trading operation and will likely start purchasing protection for its secondary loans portfolio as a result. The bank is running a pilot scheme under which the profit and loss from the plain-vanilla credit-default swap book is consolidated into the credit book, which includes eurobonds and secondary loans, according to Clive Stevens, who will be co-heading the group with Mark Everett. The integration has been planned to give investors access to greater liquidity and also to better manage the firm's credit risk, Stevens added. Previously Stevens and Everett were heads of credit trading, but for only the cash bond business.
David Fewtrell, head of secondary loan trading at HSBC in London, noted that one advantage of this change is that his desk will be able to hedge with credit-default swaps. The capacity to do this existed previously, but the new organizational structure--through more interaction and similar reporting lines--allows the desks to recognize trading opportunities more easily. The secondary loan market in Europe is still in its infancy, but many houses, such as JPMorgan, BNP Paribas and Barclays Capital, have already begun using these instruments, according to officials at those firms. Citigroup is looking at the possibility of doing this as well, according to an individual familiar with the matter. Typically a loan desk would buy a loan and then simultaneously purchase credit protection, taking advantage of the positive carry between repayments on the loan and the premium on the CDS contract.
"HSBC is looking at vanilla CDS being quoted from the vanilla euro cash bond desk in an effort to give better pricing and liquidity," said Nobby Clark, head of structured credit trading in London. Clark explained that if such a structure is finalized, credit derivatives traders would report jointly to both himself and Stevens and Everett. Clark would remain in charge of how the credit products are delivered to customers whereas Stevens and Everett would be responsible for the P&L books of traders. Fewtrell also reports to Stevens and Everett, as well as a syndication specialist.
Over the past few months, the firm has begun to consolidate its bond trading by sector, so that all currencies are traded together. Adding CDS to that group will increase liquidity further, Stevens said. "Although we note that other houses have already implemented this approach, we are implementing at a pace that ensures our existing franchises are not at risk," he added.