Derivatives houses in Australia are considering offering baskets of equity-default swaps to retail clients, who are seen as among the most adventurous in terms of structured products. Gary Vassallo, head of derivatives at Macquarie Bank in Sydney, said it is studying the possibility of launching a retail basket of international EDS names in Australia, potentially within six months. He said retail customers would likely be interested in such products, provided the risks and rewards are fully spelled out. "The Aussie market has always been open to new structures," Vassallo added. Typically financial advisors are educated on new structured products by the banks, the financial advisors then inform end investors. Other firms that have launched retail CDOs Down Under include ABN AMRO and Deutsche Bank.
The move follows Macquarie's recent issuance of retail synthetic collateralized debt obligations in Australia and New Zealand. Vassallo said any such products would primarily incorporate domestic credits, but may contain well-known international names to add diversity.
Structured products linked to EDS, whether for retail or institutional investors, could provide a higher yield than credit-default swaps and potentially be issued on names that have no public debt, noted Jason Cavanagh, head of credit trading at Westpac Banking Corp. in Sydney. "This hasn't taken off yet, but there are real benefits," he said, adding that the first retail EDS are likely to hit the market within a year. Cavanagh plans to follow the development of the EDS market before deciding whether to launch a retail product. Although credit spreads have widened somewhat in recent months in Australia, most names are still relatively tight in contrast to other markets and many default-swap names continue to trade below the underlying bonds.
Elsewhere in the region, EDS-type transactions have appeared in Japan with the launch of the first-ever rate collateralized equity obligation (DW, 3/21) and the emergence of an interbank trading market in recent weeks (DW, 4/18). Structurers have attributed the notable growth in the Japanese market as EDS is seen as an alternative to credit-linked products, which are plagued by chronically tight spreads due to the lack of two-way flows.
