Volumes in the London credit derivatives market slumped last week as traders turned their attention away from making prices and instead focused on settling contracts on Railtrack and Swissair. Overall volumes for the asset class were roughly 25-30% lower than an average week, according to traders. "There's been a noticeable decline because participants are settling contracts and thus doing less business," said Tim Frost, head of European credit derivatives at J.P. Morgan in London. He said the decline indicates a "lack of infrastructure" as the credit derivatives market continues to grow. "Most people are spending a lot of their time this week on Railtrack," noted another trader.
Also contributing to the decrease in activity was a dealer's meeting held at Merrill Lynch's London office last Tuesday, where market participants convened to discuss whether Railtrack convertibles should be delivered after the default. "It's not like we get a default every day, so this is a big deal for now," said one trader, acknowledging that the market is breaking into new ground. There is no International Swaps and Derivatives Association documentation about this scenario, but market officials said the trade body is working on an amendment as a result of Railtrack's failure. Officials at ISDA did not return calls.
However others think factors, such as less issuance on the cash market, have contributed to the decline. "Since Sept. 11 we are seeing EUR2 billion (USD1.8 billion) in new [bonds] per week and before that it was EUR6-7 billion per week," said one trader. Furthermore he said the recent spate of negative news involving Railtrack, Swissair and Marconi as well as downgrades in the auto sector, including General Motors Acceptance Corp and Ford Motor Credit, is dampening interest. "Unless people have risks to nullify, they are not out in the market," said one trader.
