Swiss Re is planning to start a European exotic interest rate derivatives business and has hired Jonathan Graham, exotic interest rate derivatives trader at Bank of America in London, to lead the charge. Graham is joining as European head of fixed income derivatives trading, but he said the focus will be on exotic derivatives. He added that Swiss Re will not be in direct competition with the dealers.
American International Group and Gen Re Securities are the two reinsurers that have undertaken the most prominent attempts to break into the interest rate derivatives market. Gen Re's attempt ended in failure and the derivatives unit was wound down in 2002, but bankers said AIG's effort has been a huge success.
The main reason for the different fortunes is in the products and clients the firms went after. Although Gen Re stayed somewhat in its niche it also craved flow business, which put it up against the major dealers and it could not compete with their distribution networks, said bankers. AIG, however, has focused on areas in which the banks have shown little interest. For example, AIG was the first institution to execute ultra-long dated swaps. The banks were hesitant about entering these trades at the time because there was nowhere to hedge the risk. Although a market has developed in long-dated swaps and the banks have moved in, one banker said hybrid derivatives, which rely on correlation assumptions the banks cannot hedge, could be a lucrative area for a highly rated insurance company.
