The U.S. credit derivatives market was impacted by two of 2001's most unsettling global market events. The first was the bankruptcy of energy-giant Enron, which was closely followed by the collapse of Argentina's government and the specter of devaluation.
Firms started to slash their credit lines to the energy company in early November when it became evident that it was heading for the largest bankruptcy in U.S. history (DW, 11/5). But trading swaps referenced to the energy company continued until the news that Dynegy was looking at taking it over in late November (DW, 11/19).
On the regulation side, Enron's bankruptcy helped to intensify talks at the International Swaps and Derivatives Association in New York, which had been working to update its credit derivatives definitions for 2002. Enron's fall underscored new proposals by ISDA that looked to do away with the old master agreement that said non-defaulting parties have to obtain an independent mark-to-market value for each contract, which is seen as cumbersome and time consuming. One new proposal under review would have non-defaulting parties obtain a value for the forward curve, according to Kimberly Summe, general counsel at ISDA in New York (DW,12/17).
The market for credit-default swaps on Argentina appeared to be headed for a boost in early April, when Domingo Felipe Cavallo replaced Ricardo Lopez Murphy as economic minister and announced a plan to stimulate the economy (DW, 3/25). One-year protection on Argentina in early March cost about 550 basis points, but by late July the market was effectively shut down as uncertainty grew over the country's ability to keep its economy from collapsing. By Christmas traders had began bracing themselves for a possible default.
However, despite the bankruptcies and downgrades some firms looked to enter the market. HSBC hired Bank of America heavyweights Rick Ziwot, global head of structured credit products, and Rick Briggs, global head of trading for structured credit products, in May (DW, 5/6).
In the structured market U.S. institutions, like their counterparts in Europe, saw a move toward managed synthetic collateralized debt obligations from static pools, said Roger Merritt, managing director of loan products for Fitch in New York. Such was the case in early October, when Bear Stearns and CDC IXIS Capital Markets hired Global Investment Advisors to manage a synthetic CDO referenced to a USD1 billion pool of investment-grade bonds (DW, 10/8).
