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Derivatives

Equity's Up, Credit's Down

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Money talks and this year it's saying equity derivatives are on the way up and credit derivatives are waning.

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Money talks and this year it's saying equity derivatives are on the way up and credit derivatives are waning. Equity derivatives bankers can expect to see a 20% rise in their bonuses this year, while their credit derivatives colleagues will see a fall of around 20%. Michael Karp, Options Group co-founder in New York, said, "Equity derivatives is going to be one of the hottest areas of growth in 2005. Many banks and hedge funds are looking for top equity derivatives professionals, but the market is very short."

According to the Options Group's compensation review, equity derivatives managing directors in trading and sales should expect a bonus of upward of USD1 million on top of their USD150-250,000 base, while a good performing v.p. will get a bonus of USD500-900,000 in addition to a base of around USD100,000.

Credit derivatives professionals in London can expect a smaller paycheck this year because the profitability has fallen out of the market, even if the volumes have stayed buoyant, according to Nick Hodson, a partner at Odgers Ray & Berndtson in London.

Absolute remuneration, however, is still higher in structured credit than equity derivatives. Odgers Ray & Berndtson estimates a managing director in structured credit trading at a top tier bank in London would take get a bonus of around USD2 million this year with a basic salary of about USD200,000. The equivalent position at a third tier bank would probably reap about USD1 million. Position in the U.S. and Asia would pay slightly less (see table, for full salary matrix).

This year saw two banks, Royal Bank of Scotland and Barclays Capital, open their wallets to boost their investment banking operations. Barclays Capital in particular quickly gained a reputation for snapping up high-quality bankers and this has pushed many derivatives professionals expectations sky high.

Among the most noteworthy team hires Barclays excecuted were Doug Warren, managing director and a senior figure in the North America credit derivatives team at Citigroup in New York, and seven of his team (DW, 11/23), and Guglielmo Sartori D'Borgoricco, co-head of U.K. and European distribution, who later brought most of his team to the firm. Headhunters, however, said Barclays and Royal Bank of Scotland's actions have had little impact on bonuses because other firms, including JPMorgan and Commerzbank, have been slashing staff. On the credit side JPMorgan's bonuses will likely be down, according to officials, because of the losses in its North American credit derivatives book. Traders said Jeremy Barnum, former head of credit derivatives trading in New York, reportedly positioned the book for spread widening, which did not materialize.

 

Weak Dollar

Derivatives bankers in Europe have been hit harder by the fall in the dollar than by the performance of the equity or credit markets. The U.S. banks pay bonuses in greenbacks and make no allowance for currency fluctuations, good or bad. The dollar fell to USD1.94 on Tuesday from USD1.75 the year before. "The fluctuation in terms of FX is massive," noted Hodson. He added one group of traders at a major U.S. bank grouped together to execute a foreign exchange hedge to prevent further deterioration of their paycheck earlier this year.

Structured Credit Trading & Credit Structuring
U.K. Based
Tier 1 Tier 2 Tier 3
Structured.  Credit. . Structured.  Credit. . Structured  Credit 
Trading Structuring Trading Structuring Trading Structuring
MD 130 + 1200 130 + 880 125 + 800 120 + 510 110 + 480 110 + 320
VP 100 + 620 100 + 500 100 + 400 100 + 320 90 + 250 90 + 200
ASS 70 + 160 70 + 150 70 + 110 70 + 100 70 + 90 70 + 70
U.S. Based
Tier 1 Tier 2 Tier 3
Structured.  Credit.  Structured.  Credit. . Structured  Credit 
Trading Structuring. Trading Structuring Trading Structuring
MD 120 + 820 120 + 750 110 + 575 110 + 470 110 + 320 110 + 200
VP 90 + 540 90 + 400 90 + 340 90 + 240 80 + 140 80 + 100
ASS 70 + 110 70 + 100 70 + 80 70 + 70 70 + 70 70 + 70
Asia Based
Tier 1 Tier 2 Tier 3
Structured.  Credit.  Structured.  Credit. . Structured  Credit 
Trading Structuring. Trading Structuring Trading Structuring
MD 140 + 950 140 + 1100 130 + 850 130 + 540 120 + 480 120 + 320
VP 110 + 550 110 + 630 110 + 340 110 + 420 100 + 180 100 + 180
ASS 75 + 150 75 + 175 75 + 100 75 + 90 70 + 90 70 + 70


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