J.P. Morgan is expanding its exotic credit derivatives presence to include New York and Asia. The products are currently offered by J.P. Morgan in London. Jean-Pierre Lardy, v.p. and head of credit derivatives trading in New York, said it plans to offer products that replicate the structure and pay off of tranches in collateralized bond obligations.
Lardy said J.P. Morgan offered these products in Europe first because investors are eager to buy credits across the Continent but do not want to have to deal with the different settlement and trading procedures in each country so they look to the derivatives markets. But he believes there will be strong demand in the U.S. because exotic credit derivatives offer a simple way to invest in CDOs. He added investors are always looking for products that can give a yield pick up, especially when interest rates are falling.
One advantage of these instruments is they allow investors to cherry pick the risk profile and exposure they want without having to take on additional exposure they do not. For example, an investor may chose to have a basket of 10 triple-B rated telecom credits packaged as a single-A credit default swap. The advantage of this method over structuring a synthetic CDO is the bank can offer these products instantly because it does not have to market the rest of the structure.
