Credit portfolio risk managers at several firms in Europe, including ABN AMRO and JPMorgan, are attempting to kick-start a bilateral credit default protection market to better manage their exposure to names that are not among the approximately 120 most actively traded. Risk managers either can't find quotes or are quoted mile-wide bid/offer spreads on names outside the 120 list, according to market officials. The solution, which could dramatically increase the depth of the credit derivative market, may be to match up natural buyers and sellers of protection on a given name or group of names, because, unlike dealers, both buyers and sellers have an incentive to arrive at transactable prices, said a credit portfolio manager.
For example, a bank with significant exposure to middle market U.K. corporate names--which are not actively traded in the credit derivatives market--might buy protection from a bank that wants to gain exposure to this sector of the market.
Rob O'Rahilly, v.p. in credit portfolio trading at JPMorgan, observed that active trading between this subset of credit derivatives users could lead to more active trading of complex credit structures. JPMorgan is exploring this avenue. ABN AMRO is actively speaking to several firms about potential trading activity, according to Gary Hawkins, head of interest rate trading in London.
Winnie Sze, director in the relative value portfolio team at Royal Bank of Canada in London, thinks trading between credit portfolios is a good idea because what one firm views as concentration, or risk, could represent an opportunity for diversification to another.
