Merrill Lynch is gearing up for its first trade in the fledgling U.K. property derivatives market. Royal Bank of Scotland, Deutsche Bank, Barclays Capital and Abbey are already active, although mostly through retail structured note efforts rather than institutional business. Glen Fairbairn, head of U.K. corporate sales at Merrill in London, said the firm is talking to financial institutions and corporates and has a few deals in the pipeline, declining comment on when these might take off. "These things take a while to bring all the way down to execution," he noted.
Fairbairn expects most early trades to be matched swaps, such as the commercial property swap executed by Deutsche Bank earlier this year (DW, 1/21). But he said firms such as Merrill will likely look to build on these simple swaps by tiering risks for counterparties who want to pay and receive different maturities, for example.
Property derivative trading is attracting dealers who see it as a potential cash cow, but end users are still reticent. The main concern of potential property swappers is liquidity, said one official. "You might as well be buying or selling battle ships," he quipped. It is also not obvious to end users with good credit ratings why they need to use a broker/dealer intermediary for matched property swaps, he added.
