Credit derivatives houses in London, including JPMorgan, Deutsche Bank and Dresdner Kleinwort Wasserstein, are working out netting agreements on credit-default swaps referenced to Marconi, the troubled U.K. telecom company, in preparation for a possible default. The move marks the first time dealers in the European market have set up contingency plans, according to several officials involved.
The initiative comes after Railtrack's default caught traders by surprise and left dealers with mountains of administrative settlement work, which slowed trading activity down for two weeks. Officials estimated most large derivatives houses have approximately 60 contracts referenced to Marconi, each with a USD10 million notional value. That is roughly three times the amount of Railtrack contracts firms held.
"Banks underestimated the amount of work it took after a credit event and as a result they are trying to get more aware of what is likely to happen in another credit event," said Jonathan Davies, head of credit derivatives at PricewaterhouseCoopers in London. That lesson has been learned, he added.
"There's a real sense Marconi could well [default] and if it does happen it becomes important for dealers because otherwise they would have to shut down shop for two weeks," one official said. "Railtrack we didn't have a chance to prepare for, but Marconi is one that isn't going to catch us by surprise," he added. To be sure, it doesn't appear that Marconi will default anytime soon. "There is further downside risk because of the [telecom] market, but at this stage a default is not our main concern," said Leandro De Torres Zabala, analyst at Standard & Poor's. It downgraded Marconi earlier this year to B plus.
An official at JPMorgan declined comment. Officials from the German banks did not return calls by press time.
