Correlation swaps on a basket of commodities are gaining liquidity and a wider range of players. The swaps were originally only offered occasionally to hedge funds by banks that had built up exposure to correlated moves in commodity prices through selling commodity-linked notes to retail and high-net-worth investors (DW, 8/11). But, traders and brokers report there is now a two-way market and liquidity is improving.
One factor that has contributed to the growth is the entrance of lower-tier banks. Smaller firms that do not have access to a retail client base interested in selling commodity correlation do not have any commodity correlation exposure, explained one hedge fund salesman in New York. "If they like the position, this is something they're starting to look into," he added.
Trading volumes for the swaps are not consistent, however. It varies depending on the correlation levels on typical baskets of commodities--say oil, aluminum and gold--and whether counterparties view the levels as attractive or not. "December was fairly slow," commented one inter-dealer broker, who noted there has been a pick up in the New Year.
