The French regulator has told French mutual funds they will be given approval to use credit derivatives--a development that has banks lining up to tap this enormous potential market. Derivative bankers were reluctant to put a dollar amount on the potential notional size of the market, but one said, "We think it's huge."
The Commissions des Opérations de Bourse (COB) said last month it would allow funds to use the products, and investment banks in the past few weeks have been quick to organize investor meetings in Paris to start preparing the market for their use. Lehman Brothers drew approximately 120 attendees to a client conference last Wednesday and JPMorgan also recently held a similar event. An official at Morgan Stanley said the firm had been stepping up visits to French clients and an official at Deutsche Bank said it is also ramping up its marketing effort.
Eric Brun, convertible arbitrage fund manager at BNP Paribas Asset Management in Paris, with EUR162 billion (USD174.6 billion) in assets under management, said the firm is preparing to use credit derivatives for hedging purposes. Bruno Ducamp, manager of a fund of hedge funds at BNP in Paris, added that French asset managers are viewing this as a good time to use credit-default swaps because so many investment managers got burnt when spreads widened over the last few years.
The COB has indicated that funds that fall within the category of Organisme de Placement Collectif en Valeurs Mobilières (OPCVM)--the most general grouping for investment vehicles in France--will be able to use credit derivatives. Jean-Marc Delion, head of asset management and savings at the COB, outlined at Lehman's client meeting how funds can use credit derivatives. Calls to Delion were referred to Christine Anglade, a COB spokeswoman, who declined comment.
Nicolas Freillat, credit derivatives marketer at JPMorgan in London, said these OPCVM funds will be able to use credit default swaps for hedging and to take on synthetic credit exposure. The COB will require that funds submit their internal procedures for monitoring and valuing their CDS positions before they receive approval.
A liberalization of the credit derivatives rules for French funds could push mutual fund managers in other European countries to pressure local regulators for similar freedoms, noted Hubert Le Liepvre, deputy head of the structured credit group at Société Générale in London.
