An exchange-traded credit derivatives market could emerge from the rubble of Enron's failure as over-the-counter professionals start kicking around the concept of credit products that bypass counterparty credit risk. Paul Mullin, global head of sales at broker CreditTrade in London, expects one of the big exchanges will list some form of credit derivative by year-end. While it would be a liquidity boon to the credit market, a listing would also benefit the exchanges. "They need product and credit is the one that is missing," he noted.
The failure of Enron, which was the reference entity in a large number of credit derivative contracts as well as a credit derivative counterparty in its own right, has prompted OTC players to re-examine their counterparty exposure.
However, a successful listed product would need to overcome several potential hurdles, not least of which is liquidity. "Everyone would love to have this stuff on the exchanges because [OTC] liquidity is lousy [compared to equities and fixed income], said Matt King, European credit strategist at J.P. Morgan in London. "But on the other hand the reason it doesn't exist yet is because liquidity is lousy," he continued.
Another potential pitfall is the divergence in provisions for restructuring in U.S. and European contracts.
But the precursor to creating a listed product, said Arne Groes, global head of credit derivatives at ABN AMRO in London, is the creation of a tradable index.
Officials from Eurex have put out feelers about creating such an index, according to a dealer who has spoken with the exchange. Uwe Velten, a spokesman at Eurex in Frankfurt, declined to comment. The London International Financial Futures Exchange does not have plans to launch a credit derivative product, according to James Barr, a spokesman.
