Loan portfolio managers who operate sideline credit derivative portfolios are desperate to find ways to tackle red ink in their profit-and-loss. According to Derivatives Week, a CIN sister publication, the hits are being caused by the double whammy of an unrelenting rally in credit spreads and punitive mark-to-market accounting.
Some dealers are touting put options on credit spreads, which pay out when spreads tighten, as a way of offsetting mark-to-market losses. While some managers have done this, others have been put off because of the instruments' illiquidity. Hetty Harlan, head trader for portfolio management at Bank of America in Chicago, said she thinks the options market is not yet deep enough for big firms to rely on. Instead she is leaning toward more active hedging portfolio management by going both long and short protection.
Som-lok Leung, executive director of the International Association of Credit Portfolio Managers, said his organization is in discussion with the Financial Accounting Standards Board and other regulators to change accounting rules. In the meantime, dealers are exploring avenues such as loan credit-default swaps and ways of applying fair-value accounting, a feature of the new IAS 39 standard, to hedging portfolios. "Whatever happens, there will be no let up in the short term," said one accounting official.
