In mid-November Dan Wilchins, managing editor of Derivatives Week, spent a day on the credit derivative trading desk at Chase in New York.
The pace may not be as hectic as bond trading, but the team are excited by working in a new market where every second piece of business expands the scope of the product.
7.30 The day is beginning. Adrian Hyde, managing director and co-head of the desk, is paging through the broker pages, checking to see where prices have moved since yesterday. The credit derivatives team seems relatively relaxed. Traders are catching up on email and news.
The big event before opening is going to be the release of retail sales data. Worse than expected data could spell trouble for plain vanilla credit default swaps on names in the retail sector.
The market in general has been steadily widening for the last few weeks, and the retail sector was battered several months ago. If demand for retail products seems to be slackening, spreads on these companies could blow out.
The numbers are important for another reason - retail demand is often seen as a barometer for the rest of the economy, and with the Federal Open Markets Committee meeting tomorrow, the market is looking for possible hints about the future direction of interest rates.
Within an hour, the data is released, and in fact, it turns out to be a non-event - retail sales figures are about what players expected, and credit default swap spreads on retail names show no signs of widening.
7.50 Joyce Frost, a relationship manager covering banks, swings by. "I'm so glad you're here," says Hyde. Richard Kennaugh, the other co-head of the desk, says, "We really need your help." Hyde jokes, "We're prepared to grovel."
Kennaugh and Frost adjourn to a conference room, where Kennaugh explains what he and Hyde need help with.
In two days Chase will be hosting a client conference on credit derivatives, and the desk was planning to put together a handbook to provide customers with a general overview of the product.
"We go around, bandying about terminology, and some of the new customers aren't terribly comfortable with it," says Kennaugh.
That's where the handbook comes in - it is meant to provide a succinct overview on issues such as documentation and pricing methodology.
For the last few weeks, members of the desk have been working on articles for the primer. Every article is good, but there is a problem with the articles taken as a whole - they are all pitched at different levels, and some of the pieces are far too advanced for the intended audience.
Kennaugh notes that one piece featured a series of equations, after which the author wrote, "It is obvious that ..." and listed a final equation. "It came back from compliance marked 'It may be obvious to you!'," says Kennaugh.
Frost is asked to tidy up the pieces and make sure they are neither too patronising nor too baffling. Frost has a marketing background and is well suited for this task. This close contact between trading and marketing is important. Traders on the desk aim not just to trade in the market but to increase its size, and often slip into marketing roles.
8.20 Hyde is working on a relative value trade linked to aerospace company Lockheed Martin, which is rated Baa3/BBB-.
The gap in price between credit default swap protection on Lockheed for one year versus five years is quite narrow, about 4bp per year. For most single-A corporate credits, the gap would be about 9bp per year.
That means selling one year protection on Lockheed Martin at 50bp and buying five year protection at 70bp makes good sense.
The curve is artificially flat, as a rally in the company's seven year bond has eased demand to buy protection. But Lockheed is a weak triple-B credit, and could conceivably widen in sympathy with most triple-B names in the market, making five year protection more expensive.
The short end is being propped up by hedging activity, and is not likely to move further out.
Later in the day, Hyde will mention this trade to his salesforce in an email. He sends several such emails, complete with trading ideas, to his salesforce every day.
Chase does little proprietary trading in credit derivatives - its main business is customer flow - so trading ideas are mainly for clients.
8.30 The group huddles. They discuss trades to look out for over the course of the day, and trading strategies to start looking into in the longer term.
8.45 Richard Kennaugh takes a call from Neil Servis, Chase's head of European CDO marketing in London. Servis is inquiring about a basket of European names that the group is pricing up for a credit linked note that southern European customers have expressed interest in.
Kennaugh and Hyde recently toured Europe with a group of Chase marketers and spoke to customers both within Chase and outside the bank, to gauge and drum up interest in structured credit products. Investors expressed interest in a credit linked note.
Kennaugh explains to Servis that vice-president Dimitry Raevsky, the quant on the desk, has priced the basket, and the customer is now examining it.
10.18 Phil Prince, managing director and head of credit products marketing for insurance companies and corporates, comes over to discuss a problem.
Chase Manhattan is structuring a securitisation of car leases on behalf of a major auto manufacturer. A special purpose vehicle will buy the leases, but still keep some residual credit risk on the manufacturer.
Prince discusses with Kennaugh the best means of hedging this risk. One option would be to use credit default swaps, but they would then have to consider how any payout would be settled.
Some 95% of credit derivatives are settled in physical form - in this case, that would mean delivering leases to the protection seller if the transaction was triggered. If settlement were in cash, the payout might have to be decided in advance (a binary structure), since leases might not lend themselves to a poll of dealers.
12.15 Hyde goes to lunch with a potential client at a major US insurance company. Insurance companies have been streaming into the market over the last few years because selling credit protection is similar to their core business of writing insurance policies.
12.30 Jesner is updating the Chase credit derivatives website, based on news reports, client requests, and prices from brokers. Creditderivatives.chase.com keeps live prices for 100 names, in maturities of one through five years.
Forest products company Weyerhaeuser's unsolicited bid for its rival Willamette Industries, for example, has seen prices on Weyerhaeuser rise.
1.45 The first trade of the day has just taken place - Chase has sold $10m of six month credit protection on AT&T to a US bank for 52bp. The name has been trading actively since the telecom company announced restructuring plans, including taking out a $25bn bank facility to finance the reorganisation.
3.40 Jesner announces that he has just completed his first trade with Chase's global trading division. The GTD is where derivatives and some spot transactions at Chase take place, and as with other parts of the bank, it has credit limits for its counterparties.
Typically, when it approaches a limit for an individual counterparty but still wishes to trade with it, the division applies for extra credit from Chase's credit management group, which manages credit lines for clients across all products.
But the GTD can now go directly to the credit derivatives desk when it needs to, which saves time. This is an extreme measure, however, and will only be done when speed of execution is crucial, says Hyde.
GTD buys one year protection on a major auto manufacturer.
This is a typical triumph for a credit derivatives desk - the individual trade is not all that important in the grand scheme of things, but drawing in a new customer means added liquidity for the market, which is important indeed.
4.10 The day is winding down. Jesner works on pricing a deal for a Yankee bank which is keen to sell one year protection on Eastman Kodak.
Chase does not need protection on the name for its own book, but because the client is a good customer, it is willing to negotiate. Chase might be willing to buy protection on Kodak if the counterparty is willing to buy or sell protection on a different name with Chase.
Each party would do one trade advantageous for itself, and one advantageous for its counterparty.
"If a broker-dealer came along wanting to sell Kodak protection to us, we probably wouldn't be interested," says Jesner. "But with a customer, it's different."
5.50 The group gets ready to go to a bar. Just two trades took place today. In a typical day, the tally would be closer to five.
It is a strange sort of limbo time. The market is waiting for results in the US presidential election. Thanksgiving, and year end, loom. The credit derivatives market is still unsure of how it feels about whether loan restructuring should trigger protection.
But still the group is busy - there are opportunities to be explored for tomorrow, and when the traders on the desk pack up, they take homework with them. *